ERICSSON LM TELEPHONE CO (Form: 20-F, Received: 04/26/2017 16:19:27)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

☐	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2016

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐	SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-12033

TELEFONAKTIEBOLAGET LM ERICSSON

(Exact Name of Registrant as Specified in its Charter)

LM ERICSSON TELEPHONE COMPANY

(Translation of Registrant’s name into English)

Kingdom of Sweden

(Jurisdiction of incorporation or organization)

SE-164 83 Stockholm, Sweden

(Address of principal executive offices)

Roland Hagman, Vice President Group Function Financial Control

Telephone: +46 10 719 53 80, Fax: +46 8 744 42 82

SE-164 83 Stockholm, Sweden

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange on which Registered
American Depositary Shares (each representing one B share)		The NASDAQ Stock Market LLC
B Shares *		The NASDAQ Stock Market LLC

*	Not for trading, but only in connection with the registration of the American Depositary Shares representing such B Shares pursuant to the requirements of the Securities and Exchange Commission.

Securities registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:


B shares (SEK 5.00 nominal value)			3,069,395,752
A shares (SEK 5.00 nominal value)			261,755,983
C shares (SEK 1.00 nominal value)			49,367,641

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes ☐ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company . See the definitions of “large accelerated filer” and “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards ^† provided pursuant to Section 13(a) of the Exchange Act. ☐

†	The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:


☐ U.S. GAAP		☒		International Financial Reporting Standards as issued by the International Accounting Standards Board		☐ Other

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 ☐ Item 18 ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

TABLE OF CONTENTS


			Page
PART I INTRODUCTION				1

ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS			2

ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE			2

ITEM 3.	KEY INFORMATION			2

	A.	Selected Financial Data		2

	B.	Capitalization and Indebtedness		4

	C.	Reasons for the Offer and Use of Proceeds		4

	D.	Risk Factors		4

ITEM 4.	INFORMATION ON THE COMPANY			4

	A.	History and Development of the Company		4

	B.	Business Overview		5

	C.	Organizational Structure		7

	D.	Property, Plant and Equipment		9

ITEM 4A.	UNRESOLVED STAFF COMMENTS			10

ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS			10

	A.	Operating Results		10

	B.	Liquidity and Capital Resources		15

	C.	Research and Development, Patents and Licenses		17

	D.	Trend Information		18

	E.	Off-Balance Sheet Arrangements		18

	F.	Tabular Disclosure of Contractual Obligations		18

ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES			18

	A.	Directors and Senior Management		18

	B.	Compensation		19

	C.	Board Practices		19

	D.	Employees		20

	E.	Share Ownership		21

ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS			21

	A.	Major Shareholders		21

	B.	Related Party Transactions		21

	C.	Interests of Experts and Counsel		22

ITEM 8.	FINANCIAL INFORMATION			22

	A.	Consolidated Statements and Other Financial Information		22

	B.	Significant Changes		22


			Page
ITEM 9.	THE OFFER AND LISTING			26

	A.	Offer and Listing Details		26

	B.	Plan of Distribution		26

	C.	Markets		26

	D.	Selling Shareholders		26

	E.	Dilution		26

	F.	Expenses of the Issue		26

ITEM 10.	ADDITIONAL INFORMATION			26

	A.	Share Capital		26

	B.	Memorandum and Articles of Association		26

	C.	Material Contracts		30

	D.	Exchange Controls		30

	E.	Taxation		30

	F.	Dividends and Paying Agents		34

	G.	Statement by Experts		34

	H.	Documents on Display		34

	I.	Subsidiary Information		34

ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			34

ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES			35

	A.	Debt Securities		35

	B.	Warrants and Rights		35

	C.	Other Securities		35

	D.	American Depositary Shares		35
PART II				36

ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES			36

ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS			36

ITEM 15.	CONTROLS AND PROCEDURES			36

	A.	Disclosure Controls and Procedures		36

	B.	Management’s Annual Report on Internal Control Over Financial Reporting		36

	C.	Attestation Report of the Registered Public Accounting Firm		37

	D.	Changes in Internal Control Over Financial Reporting		37

ITEM 16.	[RESERVED]			37

ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT			37

ITEM 16B.	CODE OF ETHICS			37

ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES			38

ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES			38


		Page
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS		38

ITEM 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT		38

ITEM 16G.	CORPORATE GOVERNANCE		39

ITEM 16H.	MINE SAFETY DISCLOSURE		40

PART III			40

ITEM 17.	FINANCIAL STATEMENTS		40

ITEM 18.	FINANCIAL STATEMENTS		40

ITEM 19.	EXHIBITS		42

iii

PART I

INTRODUCTION

Unless otherwise indicated, all references herein to “Ericsson,” the “Company,” “the Group,” “we,” “us,” or “our” or “our company” are references to Telefonaktiebolaget LM Ericsson and its consolidated subsidiaries.

This document is our Annual Report on Form 20-F for the year ended December 31, 2016 (the “2016 Form 20-F”). Reference is made to the English version of our Swedish Annual Report for 2016, with certain adjustments made to comply with U.S. requirements, which is attached hereto as Exhibit 15.1 (the “2016 Swedish Annual Report”). Only (i) the information included in this 2016 Form 20-F, (ii) the information in the 2016 Swedish Annual Report that is incorporated by reference in this 2016 Form 20-F, and (iii) the exhibits to the 2016 Form 20-F that are required to be filed pursuant to the Form 20-F shall be deemed to be filed with the Securities and Exchange Commission for any purpose, including incorporation by reference into the Registration Statement on Form F-3 filed on May 8, 2015 (File No. 333-203977) and any other document filed by us pursuant to the Securities Act of 1933, as amended, which incorporates by reference the 2016 Form 20-F. Any information in the 2016 Swedish Annual Report that is not referenced in the 2016 Form 20-F or filed as an exhibit thereto shall not be deemed to be so incorporated by reference.

Certain industry, technical and financial terms used in this 2016 Form 20-F are defined in the subsections entitled “Glossary” and “Financial Terminology” of the 2016 Swedish Annual Report, which are incorporate herein by reference.

Market data and certain industry forecasts used herein were obtained from internal surveys, market research, publicly available information and industry publications. While we believe that market research, publicly available information and industry publications we use are reliable, we have not independently verified market and industry data from third-party sources. Moreover, while we believe our internal surveys are reliable, they have not been verified by any independent source.

The information included on www.ericsson.com and other websites that appear in this 2016 Form 20-F is not incorporated by reference herein. From time to time, we may use our website as a channel of distribution of material company information. Financial and other material information regarding our company is routinely posted on and accessible at www.ericsson.com .

Forward-Looking Statements

This 2016 Form 20-F includes forward-looking statements, including statements reflecting management’s current views relating to the growth of the market, future market conditions, future events and expected operational and financial performance. The words “believe,” “expect,” “foresee,” “anticipate,” “assume,” “intend,” “may,” “could,” “plan,” “estimate,” “forecast,” “will,” “should,” “predict,” “aim,” “ambition,” “target,” “might,” or, in each case, their negative, and similar words are intended to help identify forward-looking statements.

Forward-looking statements may be found throughout this document, and include statements regarding:

•

Our goals, strategies and operational or financial performance expectations

•

Development of corporate governance standards, stock market regulations and related legislation

•

The future characteristics of the markets in which we operate

•

Projections and other characterizations of future events

•

Our liquidity, capital resources, capital expenditures, our credit ratings and the development in the capital markets, affecting our industry or us

•

The expected demand for our existing as well as new products and services

•

The expected operational or financial performance of joint ventures and other strategic cooperation activities

•

The time until acquired entities will be accretive to income

•

Technology and industry trends including regulatory and standardization environment, competition and our customer structure

•

Our plans for new products and services including research and development expenditures.

Although we believe that the expectations reflected in these and other forward-looking statements are reasonable, we cannot assure you that these expectations will materialize. Because forward-looking statements are based on assumptions, judgments and estimates, and are subject to risks and uncertainties, actual results could differ materially from those described or implied herein

Important factors that could affect whether and to what extent any of our forward-looking statements materialize include, but are not limited to the factors described under “Item 3.D. Risk Factors” in this 2016 Form 20-F.

We undertake no obligation to publicly update or revise any forward-looking statements included in this 2016 Form 20-F, whether as a result of new information, future events or otherwise, except as required by applicable law or stock exchange regulation.

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3.

KEY INFORMATION

A.	Selected Financial Data

We present below certain selected financial data derived from our consolidated financial statements as of and for the years ended December 31, 2016, 2015, 2014, 2013 and 2012, included herein, prepared in accordance with the International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). IFRS differs in certain significant respects from the accounting principles generally accepted in the United States, or “U.S. GAAP.”

The summary financial data should be read in conjunction with our consolidated financial statements and the notes thereto contained in this 2016 Form 20-F, as well as the information set forth under the heading “Item 5. Operating and Financial Review and Prospects” and the information set forth under the following headings of the 2016 Swedish Annual Report, which are incorporated herein by reference:

•

Other Information

•

Alternative Performance Measures (APMs)

•

Financial Terminology and Exchange rates


	2016			Change			2015			2014			2013			2012
Income statement and cash flow items, SEK million
Net sales		222,608			–10	%		246,920			227,983			227,376			227,779
Operating expenses		–60,501			–6	%		–64,129			–63,408			–58,509			–58,856
Operating income		6,299			–71	%		21,805			16,807			17,845			10,458
Net income		1,895			–86	%		13,673			11,143			12,174			5,938
Restructuring charges		7,567			50	%		5,040			1,456			4,453			3,447
Cash flow from operating activities		14,010			–32	%		20,597			18,702			17,389			22,031

Year-end position, SEK million
Total assets		283,347			0	%		284,363			293,558			269,190			274,996
Property, plant and equipment		16,734			5	%		15,901			13,341			11,433			11,493
Stockholders’ equity		139,817			–5	%		146,525			144,306			140,204			136,883
Non-controlling interest		675			–20	%		841			1,003			1,419			1,600

Per share indicators
Earnings per share, basic, SEK		0.53			–87	%		4.17			3.57			3.72			1.80
Earnings per share, diluted, SEK		0.52			–87	%		4.13			3.54			3.69			1.78
Dividends per share, SEK		1.00			–73	%		3.70			3.40			3.00			2.75
Dividend per share (USD)		0.11			–71	%		0.39			0.41			0.46			0.42

Number of shares outstanding (in millions)
end of period, basic		3,269			—			3,256			3,242			3,231			3,220
average, basic		3,263			—			3,249			3,237			3,226			3,216
average, diluted		3,303			1	%		3,282			3,270			3,257			3,247
Capital stock, SEK million		16,657						16,526			16,526			16,526			16,526

Other information, SEK million
Additions to property, plant and equipment		6,129			–26	%		8,338			5,322			4,503			5,429
Depreciations and write-downs/impairments of property, plant and equipment		4,569			–3	%		4,689			4,316			4,209			4,012
Acquisitions/capitalization of intangible assets		5,260			1	%		5,228			6,184			4,759			13,247
Amortization and write-downs/impairments of intangible assets		4,550			–18	%		5,538			5,629			5,928			5,877
Research and development expenses		31,635			–9	%		34,844			36,308			32,236			32,833
as percentage of net sales		14.2	%		—			14.1	%		15.9	%		14.2	%		14.4	%
Inventory turnover days		69			8	%		64			64			62			73

Alternative Performance Measures (APMs) ¹⁾
Gross margin		29.8	%		—			34.8	%		36.2	%		33.6	%		31.6	%
Operating margin		2.8	%		—			8.8	%		7.4	%		7.8	%		4.6	%
EBITA margin		4.0	%		—			10.5	%		9.3	%		9.8	%		6.6	%
Cash conversion		175.0	%		—			85	%		84	%		79	%		116	%
Capital employed, SEK million		190,901			–2	%		195,150			189,839			180,903			176,653
Return on equity		1.2	%		—			9.3	%		8.1	%		8.7	%		4.1	%
Return on capital employed		3.2	%		—			11.6	%		9.8	%		10.7	%		6.7	%
Equity ratio		49.6	%		—			51.8	%		49.5	%		52.6	%		50.4	%
Capital turnover		1.2			—			1.3			1.2			1.3			1.3
Working capital, SEK million		89,039			–15	%		104,811			103,246			106,940			100,619
Gross cash, SEK million		57,877			–13	%		66,270			72,159			77,089			76,708
Net cash, SEK million ²⁾		31,191			–24	%		41,150			48,014			47,634			48,041

Statistical data, year-end
Number of employees		111,464			–4	%		116,281			118,055			114,340			110,255
of which in Sweden		15,303			–10	%		17,041			17,580			17,858			17,712
Export sales from Sweden, SEK million		107,036			–9	%		117,486			113,734			108,944			106,997

A reconciliation to the most directly reconcilable line items in the financial statements for 2016 and five comparison years is available under the heading “Alternative Performance Measures” of the 2016 Swedish Annual Report. Reconciliation of ten years is available in a separate document available on www.ericsson.com/thecompany/investors/financial-reports.

2)	The definition of Net cash has been adjusted in 2016 (Post-employment benefits are no longer included and Interest-bearing securities, non-current are included). Net cash for prior periods has been recalculated using the new definition.

Exchange Rates

The following tables provide information with respect to the exchange rate for SEK per USD 1.00 based on the noon buying rate for cable transfers in SEK as certified for customs purposes by the Federal Reserve Bank of New York. The noon buying rate of 7 April was SEK 9.0503 per USD 1.00. The average exchange rate is computed using the noon buying rate on the last business day of each month during the period indicated.


Year ended December 31,	Average
2012		6.7247
2013		6.5152
2014		6.9222
2015		8.4643
2016		8.5959


Month	High		Low
October 2016		9.0646		8.5641
November 2016		9.2686		8.8938
December 2016		9.4207		9.0784
January 2017		9.1583		8.8254
February 2017		9.0134		8.7176
March 2017		9.0664		8.7701

Effects of exchange rate fluctuations on our business is described in the Notes to the Consolidated Financial Statements—Note C20, “Financial Risk Management and Financial Instruments.”

Noon buying rates are not used in the preparation of our financial statements. The exchange rates used in the preparation of our consolidated financial statements are presented below:


	2016		2015
SEK/EUR
Average rate		9.44		9.34
Closing rate		9.56		9.17
SEK/USD
Average rate		8.56		8.39
Closing rate		9.06		8.40

B.	Capitalization and Indebtedness

Not applicable.

C.	Reasons for the Offer and Use of Proceeds

Not applicable.

D.	Risk Factors

The information set forth under the heading “Financials–Risk Factors” of the 2016 Swedish Annual Report is incorporated herein by reference.

ITEM 4.

INFORMATION ON THE COMPANY

A.	History and Development of the Company

The information set forth under the following headings of the 2016 Swedish Annual Report is incorporated herein by reference:

•

The Business

•

Ericsson in Brief

•

Change in Reporting Structure from 2017

•

Financials – Board of Directors’ Report

•

Business in 2016

•

Financial Highlights – Capital expenditures

For capital expenditures we usually use available cash from operations

•

Notes to the Consolidated financial statements

•

Note C26 – Business combinations

•

Note C32 – Events after the reporting period

General facts on the company

Legal and commercial name of the Parent Company: Telefonaktiebolaget LM Ericsson (publ).

Organization number: 556016-0680

Legal form of the Parent Company: A Swedish limited liability company, organized under the Swedish Companies Act.

Country of incorporation: Sweden.

Date of incorporation: The Parent Company was incorporated on August 18, 1918, as a result of a merger between AB LM Ericsson & Co. and Stockholms Allmänna Telefon AB.

Domicile: Our registered office is Telefonaktiebolaget LM Ericsson, SE–164 83 Stockholm, Sweden. Our headquarters are located at Torshamnsgatan 21, Kista, Sweden.

Telephone number: +46 10 719 0000

Website: www.ericsson.com . The information included on our website is not incorporated herein by reference.

Agent in the US: Ericsson Inc., Vice President Legal Affairs, 6300 Legacy Drive, Plano, Texas 75024. Telephone number: +1 972 583 0000.

Shares: Ericsson’s Class A and Class B shares are traded on Nasdaq Stockholm. In the US, our American Depository Shares (ADS), each representing one underlying Class B share, are traded on NASDAQ New York.

Parent company operations: The business of the parent company, Telefonaktiebolaget LM Ericsson, consists mainly of corporate management, holding company functions and internal banking activities. Our parent company operations also include customer credit management activities performed by Ericsson Credit AB on a commission basis.

Subsidiaries and associated companies: For a list of our significant subsidiaries, please see “Item 4C. Investments”. In addition to our joint venture ST-Ericsson (up until August 2, 2013), we are engaged in a number of minor joint ventures and cooperative arrangements. For more information regarding risks associated with joint ventures, strategic alliances and third-party agreements, please see “Item 3D. Financials–Risk Factors - Market, Technology and Business Risks”.

Company history and development

Innovating to empower people, business and society

Our origins date back to 1876 when Alexander Graham Bell filed a patent application in the United States for the telephone. The same year, Lars Magnus Ericsson opened a small workshop in Stockholm to repair telegraph instruments and sell his own telephone equipment.

Today, Ericsson is a leading provider of communications equipment, telecom services and support solutions. Our customers, in over 180 countries, are mainly operators of communications networks worldwide. We manage networks, or parts of networks, for one billion subscribers.

B.	Business Overview

The information set forth under the following headings of the 2016 Swedish Annual Report is incorporated herein by reference:

•

Ericsson in brief

•

The business

•

This is Ericsson

•

This is the market

•

The customers

•

Networks

•

IT & Cloud

•

Media

•

Global presence 24/7

•

Customer group Industry and Society

•

Customer Group – IPR & Licensing

•

Reporting Structure 2016

•

Change in Reporting Structure from 2017

•

Financials

•

Board of Directors’ report

•

Financial highlights – Research and development, patents and licensing

•

Financial highlights – Seasonality

•

Business results – Segments

•

Business results – Regions

•

Sourcing and supply

•

Sustainability and corporate responsibility

•

Notes to the consolidated financial statements

•

Note C3 – Segment information

•

Risk factors

•

Market, technology and business risks

•

Regulatory, compliance and corporate governance risks

•

Corporate Governance

•

Corporate Governance report 2016

•

Regulation and compliance

Disclosure pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRA)

Ericsson has conducted business in Iran/Persia since the late nineteenth century, opened an office in Iran in 1973 and later established a local subsidiary in the country. Ericsson strongly believes in enabling communication for all and believes that access to communications can enable the right to health, education and freedom of expression. Ericsson’s business activities in Iran principally involve the sale of communications infrastructure related products and services, including support, installation and maintenance services. Ericsson’s exports from the European Union (the “EU”) to Iran are performed under export licenses from the Swedish Agency for Non-Proliferation and Export Controls.

Due to its operations in Iran, and having staff permanently in the country, Ericsson has contacts with its local customers and retains certain local suppliers, including banks, and service providers. In addition, Ericsson has other dealings incidental to its local activities, such as making payments for taxes, salaries, rents, utilities and office and similar supplies as well for local accommodation and transportation and customs related services. As a result, Ericsson has contact with companies that may be owned or controlled by the government of Iran. While Ericsson seeks to obtain information regarding the actual business names and ownership of customers and other counterparties in Iran through its policies and procedures designed to ensure that Ericsson “knows its customers”, it is difficult to determine ownership and control with certainty, particularly with respect to determining whether an entity engaged in commercial activities is owned or controlled by the government.

During 2016, Ericsson sold communications infrastructure related products and services in Iran to the following telecommunications companies operating in the country: MTNIrancell, Mobile Communication Company of Iran (“MCCI”) and Dadeh Gostare Asre Novin (“Hiweb”). Ericsson also contracted with Pars Online for such sales. During 2016, Ericsson’s gross revenue (reported as net sales) related to sales to Hiweb, MTNIrancell and MCCI in Iran was approximately SEK 2,801 million. Ericsson does not normally allocate net profit (reported as net income) on a country-by-country or activity-by-activity basis, other than as set forth in Ericsson’s consolidated financial statements prepared in accordance with IFRS as issued by the IASB. However, Ericsson has estimated that its operating income (income before taxes and financial net) from such sales, after internal cost allocation was approximately SEK - 332 million during 2016. Ericsson intends to continue to engage with existing customers and explore opportunities with new customers in Iran while continuously monitoring international developments as they relate to Iran and its government.

In some instances, Ericsson has had to arrange performance bonds or similar financial guarantees to secure Ericsson’s performance of obligations under the commercial agreements Ericsson has entered into relating to the business in Iran. In such instances, Ericsson usually engages its banks outside Iran, who in turn engage local banks in the country. These local banks include Tejarat Bank, Melli Bank and Saderat Bank. Although some bonds and guarantees are still in place, no new performance bonds or similar guarantees involving these three banks with respect to Ericsson’s business activities in Iran were issued during 2016, nor were payments made to beneficiaries under any such existing bond or guarantee.

During 2016, Bank Mellat, Post Bank of Iran and Tejarat Bank (local banks in Iran) issued bank guarantees to secure Iranian customer payment obligations to Ericsson and Eghtesad Novin Bank (a local bank in Iran) issued a letter of credit to one of Ericsson’s banks outside Iran, to secure an Iranian customer’s payment obligations to Ericsson. Further, some payments made to Ericsson’s local subsidiary and payments required to be made by the local subsidiary to suppliers involve banks controlled by the government of Iran, such as Bank Mellat, Tejarat Bank, Bank Melli, Saderat Bank, Keshavarzi Bank, Eghtesad Novin Bank, Refah Bank and Bank Sepah. Ericsson also received payments from customers to Ericsson’s accounts outside Iran.

C.	Organizational Structure

The following list shows certain shareholdings owned directly and indirectly by our parent company as of December 31, 2016. A complete list of shareholdings, prepared in accordance with the Swedish Annual Accounts Act and filed with the Swedish Companies Registration Office (Bolagsverket), may be obtained upon request to: Telefonaktiebolaget LM Ericsson, External Reporting, SE-164 83 Stockholm, Sweden.

Shares owned directly by the Parent Company


Company	Reg. No.		Domicile		Percentage of ownership			Par value in local currency, million		Carrying value, SEK million
Subsidiary companies
Ericsson AB		556056-6258		Sweden		100			50		20,731
Ericsson Shared Services AB		556251-3266		Sweden		100			361		2,216
Netwise AB		556404-4286		Sweden		100			2		306
Datacenter i Rosersberg AB		556895-3748		Sweden		100			—		88
Datacenter i Mjärdevi Aktiebolag		556366-2302		Sweden		100			10		69
AB Aulis		556030-9899		Sweden		100			14		6
Ericsson Credit AB		556326-0552		Sweden		100			5		5
Other (Sweden)						—			—		1,642
Ericsson Austria GmbH				Austria		100			4		65
Ericsson Danmark A/S				Denmark		100			90		216
Oy LM Ericsson Ab				Finland		100			13		196
Ericsson Participations France SAS				France		100			26		524
Ericsson Germany GmbH				Germany		100			—		4,232
Ericsson Hungary Ltd.				Hungary		100			1,301		120
L M Ericsson Limited				Ireland		100			4		34
Ericsson Telecomunicazioni S.p.A.				Italy		100			44		5,357
Ericsson Holding International B.V.				The Netherlands		100			222		3,200
Ericsson A/S				Norway		100			75		114
Ericsson Television AS				Norway		100			161		1,670
Ericsson Corporatia AO				Russia		100			5		5
Ericsson España S.A.				Spain		100			43		170
Ericsson AG				Switzerland		100			—		—
Ericsson Holdings Ltd.				United Kingdom		100			328		4,094
Other (Europe, excluding Sweden)						—			—		680
Ericsson Holding II Inc.				United States		100			2,897		29,907

Companía Ericsson S.A.C.I.				Argentina		95	¹⁾		41		15

Ericsson Canada Inc.				Canada		100			—		51
Belair Networks				Canada		100			—		170
Ericsson Telecom S.A. de C.V.				Mexico		100			939		1,050
Other (United States, Latin America)						—			—		96
Teleric Pty Ltd.				Australia		100			20		100
Ericsson Ltd.				China		100			2		2
Ericsson (China) Company Ltd.				China		100			65		475
Ericsson India Private Ltd.				India		100			725		147
Ericsson India Global Services PVT. Ltd				India		100			389		64
Ericsson Media Solutions Ltd				Israel		100			9		711
Ericsson-LG CO Ltd.				Korea		75			375		2,544
Ericsson (Malaysia) Sdn. Bhd.				Malaysia		70			2		4
Ericsson Telecommunications Pte. Ltd.				Singapore		100			2		1
Ericsson South Africa PTY. Ltd				South Africa		70			—		135
Ericsson Taiwan Ltd.				Taiwan		90			270		36

Ericsson (Thailand) Ltd.				Thailand		49	²⁾		90		17

Other countries (the rest of the world)						—			—		299

Total											81,564


Joint ventures and associated companies
ST-Ericsson SA				Switzerland		50			137		—
Rockstar Consortium Group				Canada		21			1		—
Ericsson Nikola Tesla d.d.				Croatia		49			65		330

Total											330

1)	Through subsidiary holdings, total holdings amount to 100% of Compania Ericsson S.A.C.I.

2)	Through subsidiary holdings, total holdings amount to 100% of Ericsson (Thailand) Ltd.

Shares owned by subsidiary companies

Company

Reg. No.

Domicile

Percentage
of
ownership

Subsidiary companies

Ericsson Cables Holding AB

556044-9489

Sweden

100

Ericsson France SAS

France

100

Ericsson Telekommunikation GmbH 1)

Germany

100

Ericsson Telecommunicatie B.V.

The Netherlands

100

Ericsson Telekomunikasyon A.S.

Turkey

100

Ericsson Ltd.

United Kingdom

100

Creative Broadcast Services Holdings Ltd.

United Kingdom

100

Ericsson Inc.

United States

100

Ericsson Wifi Inc.

United States

100

Drutt Corporation Inc.

United States

100

Redback Networks Inc.

United States

100

Telcordia Technologies Inc.

United States

100

Ericsson Telecomunicações S.A.

Brazil

100

Ericsson Australia Pty. Ltd.

Australia

100

Ericsson (China) Communications Co. Ltd.

China

100

Nanjing Ericsson Panda Communication Co. Ltd.

China

Ericsson Japan K.K.

Japan

100

Ericsson Communication Solutions Pte Ltd.

Singapore

100

Disclosures Pursuant to Section 264b of the German Commercial Code (Handelsgesetzbuch – HGB) Applying Section 264b HGB, Ericsson Holding GmbH and Ericsson Telekommunikation GmbH, located in Frankfurt am Main/Germany, are exempted from the obligation to prepare, have audited and disclose financial statements and a management report in accordance with the legal requirements being applicable for German corporations.

D.	Property, Plant and Equipment

The information set forth under the following headings of the 2016 Swedish Annual Report is incorporated herein by reference:

•

The business

•

Sustainability and corporate responsibility

•

Financials

•

Board of Directors’ report

•

Financial highlights – Capital expenditures

•

Sustainability and corporate responsibility

•

Notes to the consolidated financial statements

•

Note C11 – Property, plant and equipment

•

Note C27 – Leasing

•

Risk factors

•

Regulatory, Compliance and Corporate Governance risks

Primary manufacturing and assembly facilities

We continuously adjust our production capacity to meet expected customer demand. During 2016, our overall capacity utilization was around 85%.

The table below summarizes where we have major sites and the total floor space at year-end. Facilities are leased. The majority of the floor space within our production facilities is used for assembly.


	2016				2015				2014
	Sites		Thousands of sq meters**		Sites*		Thousands of sq meters**		Sites		Thousands of sq meters**
Sweden		4		21.3		4		21.3		4		20.7
China		2		13		2		13		3		19.8
Estonia		1		6		1		6		1		9.1
Italy		0		0		0		0		1		16
Brazil		1		4.5		1		4.5		1		25.3
Mexico		1		0.8		1		0.8		1		0.8
India		1		10.8		1		10.8		1		24.5
Total		10		56.4		10		56.4		12		116.2

*	In 2015, we closed our facility in Italy and one facility in China.

**	Floor space in square meters does not include any warehouses and any transportation areas

ITEM 4A.

Unresolved Staff Comments

None.

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A.	Operating Results

The information set forth under the following headings of the 2016 Swedish Annual Report is incorporated herein by reference:

•

Ericsson in brief

•

The business

•

This is Ericsson

•

Global presence 24/7

•

Reporting Structure 2016

•

Other information

•

Five-year summary

•

Alternative Performance Measures (APMs)

•

Financials

•

Board of Directors’ report

•

Business in 2016

•

Financial highlights

•

Business results – Segments

•

Business results – Regions

•

Risk management

•

Notes to the consolidated financial statements

•

Note C1 – Significant accounting policies

•

Note C20 – Financial risk management and financial instruments – Foreign exchange risk

•

Risk Factors

•

Market, technology and business risks

•

Regulatory, Compliance and Corporate Governance risks

Operating results for the years ended December 31, 2014 and 2015

Business in 2015

In 2015, net sales increased by 8% mainly due to sales growth in India, North America and Mainland China as well as higher IPR licensing revenues. All three segments showed sales growth. Both operating income and margin increased compared to last year despite significantly higher restructuring charges. The increase is mainly related to higher IPR licensing revenues, lower negative currency hedge effects and lower operating expenses, excluding restructuring charges. In the year, the US dollar strengthened towards a number of currencies including SEK, impacting sales and operating income positively.

The IPR strategy, to generate value from investments in R&D, has been successful and over the last five years IPR licensing revenues have more than tripled. IPR revenues were SEK 14.4 (9.9) billion. Ericsson now has agreements with the majority of handset suppliers.

In 2015, there was good progress in the targeted growth areas; IP network, Cloud, OSS and BSS, TV and Media as well as Industry and Society. Ericsson continued to invest in order to establish leadership in these areas.

The effort to restore Network Rollout to a sustainable profitable business progressed well, with a break-even operating income, excluding restructuring charges, for the second half of 2015.

The global cost and efficiency program progressed according to plan, with the target to achieve net annual savings of SEK 9 billion during 2017 compared with 2014. Operating expenses, excluding restructuring charges, declined to SEK 61.4 (63.0) billion. Ericsson will continue to address operating expenses and increase efforts to further reduce cost of sales in order to improve the gross margin.

Ericsson delivered a full-year cash flow from operating activities of SEK 20.6 (18.7) billion, exceeding the cash conversion target of more than 70%. The Board of Directors proposes a dividend of SEK 3.70 (3.40) per share for 2015, an increase of 9% compared with last year.

Financial highlights

Net Sales

Reported sales increased by 8%. Sales growth in India, North America and Mainland China as well as higher IPR licensing revenues were partly offset by lower sales in Japan, Russia and Brazil.

All three segments showed sales growth. Global Services sales grew by 11%, with 15% growth in Professional Services, while Network Rollout sales were almost flat. Networks sales grew by 5% and Support Solutions sales by 19%.

IPR licensing revenues amounted to SEK 14.4 (9.9) billion. In 2015, a global patent license agreement was signed with Apple.

In the year, the US dollar strengthened towards a number of currencies including SEK, impacting sales positively. At the same time the strong US dollar gradually impacted investments negatively in some emerging markets.

Sales, adjusted for comparable units and currency, decreased by –5%.

Gross margin

Gross margin declined to 34.8% (36.2%). Excluding restructuring charges, the gross margin declined to 35.7% (36.6%) due to a mix with a lower share of mobile capacity business and higher share of Global Services sales. This was partly offset by higher IPR licensing revenues and effects of implemented efficiency measures.

The mix of sales by commodity was; software 23% (24%), hardware 34% (34%) and services 43% (42%).

Restructuring charges and global cost and efficiency program

Restructuring charges amounted to SEK –5.0 (–1.5) billion, in line with previous estimates. The charges were mainly related to the global cost and efficiency program announced in November 2014. The global cost and efficiency program is progressing according to plan and is expected to generate net annual savings of SEK 9 billion during 2017 compared with 2014.

With current visibility, total restructuring charges for 2016 are estimated to be approximately SEK 3–4 billion. This includes both restructuring charges related to the global cost and efficiency program and normal restructuring charges for the ongoing business transformation.

Operating expenses

Total operating expenses increased to SEK 64.1 (63.4) billion. Operating expenses, excluding restructuring charges, decreased from SEK 63.0 to SEK 61.4 billion, due to lower R&D expenses amounting to SEK 32.8 (36.0) billion. This is partly a result of implementation of activities related to the global cost and efficiency program. Additions to capitalized development expenses amounted to SEK 3.5 (1.5) billion. The increase was due to higher activity in technology platform development than a year ago.

Other operating income and expenses

Other operating income and expenses improved to SEK 0.1 (–2.2) billion. The increase is mainly related to currency hedge effects of SEK –1.1 (–2.8) billion. They derive from the hedge contract balance in US dollar, which has further decreased in value. The SEK has weakened towards the US dollar between December 31, 2014 (SEK/USD rate 7.79) and December 31, 2015 (8.40). The negative currency hedge effects were more than offset by several minor positive items and a capital gain of SEK 0.3 billion related to a real estate divestment in the US.

Operating income

Operating income increased to SEK 21.8 (16.8) billion despite significantly higher restructuring charges. The increase is mainly related to higher IPR licensing revenues, lower negative currency hedge effects and lower operating expenses, excluding restructuring charges. The net currency effect had a positive impact on operating income. Operating margin was 8.8% (7.4%).

Financial net

Financial net amounted to SEK –1.9 (–1.0) billion. The decrease is mainly due to a negative effect of foreign currency revaluation and lower interest rates.

Taxes

The tax rate for 2015 was 31% compared with 30% in 2014, negatively impacted by the geographical mix. Tax costs were SEK –6.2 (–4.7) billion.

Net income and EPS

Net income increased to SEK 13.7 (11.1) billion, for the same reasons as for the increase in operating income. EPS diluted was SEK 4.13 (3.54).

Business results – Segments

Networks

Reported sales increased by 5% compared to last year. The increase was mainly due to higher IPR licensing revenues. Operator investments in mobile broadband in India and South East Asia increased. The large-scale LTE deployments in Mainland China continued at a high pace in 2015. Sales in North America were flat compared to last year, supported by the strengthened US dollar. Mobile broadband investments in North America were negatively impacted by operator focus on cash flow optimization in order to finance major acquisitions and spectrum auctions.

In 2015, sales in targeted growth area IP networks grew, mainly driven by investments in packet core, VoLTE and user data management.

During the year, the US dollar strengthened towards a number of currencies, including SEK, impacting sales positively. At the same time, the strong US dollar gradually impacted investments negatively in some emerging markets. Sales, adjusted for comparable units and currency, decreased by –8% compared to last year.

Operating income and margin decreased due to a higher share of mobile broadband coverage business and higher restructuring charges. Increased IPR licensing revenues, lower operating expenses and lower negative effect of currency hedge contracts contributed positively to operating income and margin.

The year started with a high level of R&D expenses which gradually decreased as a result of the global cost and efficiency program. The ambition to improve Networks profitability remains.

Restructuring charges amounted to SEK –2.8 (–0.4) billion and the negative effect from hedge contracts was SEK –0.9 (–2.1) billion.

Global Services

Reported sales increased by 11% compared to last year. Professional Services reported sales grew 15% with strong development across the portfolio and with growth in all ten regions.

Consulting and Systems Integration sales grew, driven by OSS and BSS transformation projects and by solutions for Industry & Society customers. Sales in Managed Services grew by 17% and the number of signed contracts increased by more than 40% compared with 2014.

Network Rollout sales were flat. Lower coverage project activities in Japan, North America and Latin America impacted sales negatively.

Global Services sales, adjusted for comparable units and currency, declined –2%.

Global Services operating income increased by more than 30% compared with 2014, driven by increased sales in Professional Services and reduced losses in Network Rollout. Professional Services margin was stable compared to last year.

The effort to restore Network Rollout profitability progressed well with a break-even result, excluding restructuring, for the second half of the year. Network Rollout full-year operating income improved to SEK –1.4 (–2.5) billion.

Restructuring charges for Global Services increased to SEK –1.7 (–0.8) billion. The implementation of the Global Services delivery strategy accelerated during the year as part of the global cost and efficiency program, resulting in a remote delivery rate of 50% (44%). The ambition to optimize service delivery and improve profitability will continue.

The effect of currency hedge contracts on operating income was SEK –0.2 (–0.6) billion.

Support Solutions

Reported sales increased by 19% compared with 2014, with North America and India as main contributors. Sales, adjusted for comparable units and currency, were flat. The overall transition of business models, from traditional telecom software licenses to recurrent license revenue deals, continued.

Sales in OSS and BSS developed favorably. Growth of mobile broadband drives operators to transform their OSS and BSS solutions, in order to monetize the data growth while at the same time managing the increased complexity. Two important TV & Media agreements were announced in North America in the second half of the year, showing the strong position Ericsson has in this transforming market.

IPR licensing revenues increased compared with 2014.

Operating Income and margin improved significantly compared with 2014, driven by higher sales. Focus going forward is to improve earnings leverage through increased recurring software sales and efficiencies.

Restructuring charges increased to SEK –0.5 (–0.1) billion due to the global cost and efficiency program. The effect of currency hedge contracts on operating income was SEK –0.1 (–0.2) billion.

Business results – Regions

North America

Mobile broadband investments were slow as operators focused on cash flow optimization in order to finance major acquisitions and spectrum auctions. Investments stabilized during the second half of the year, driven by data traffic growth. ICT transformation, TV & Media and Professional Services developed favorably.

Latin America

Sales decreased compared to last year mainly due to lower activities in Brazil. Operator investments increased in local currency, but not enough to compensate for the depreciation towards the US dollar and currency restrictions in many parts of the region. Professional Services sales grew, mainly in OSS and BSS.

Northern Europe and Central Asia

Sales declined, primarily due to lower mobile broadband investments in Russia with sales of SEK 4.7 (6.7) billion. However, sales stabilized in the second half of the year, but at a lower level compared to the same period last year. Professional Services sales increased, driven by Managed Services and ICT transformation projects in the Nordics. TV & Media and OSS and BSS developed favorably, driving sales growth in Support Solutions.

Western and Central Europe

Investments in mobile broadband were driven by the transition from 3G to 4G and capacity enhancements. At the same time, some important projects peaked. Sales were stable with a shift towards Professional Services and Support Solutions, as operators focus on network optimization, efficiency and new functionality.

Mediterranean

Sales increased somewhat, driven by Managed Services. Investments in mobile broadband were driven by the transition from 3G to 4G and improvements of the quality and capacity of the networks.

Middle East

Sales increased, primarily in Global Services. In the first half of the year, Network sales growth was mainly driven by some major mobile broadband projects, which were completed in the second half of the year.

Sub-Saharan Africa

Sales increased across all segments, driven by strong consumer demand for mobile broadband, despite a challenging regulatory environment and recent macro-economic development. Operators’ focus on network quality and efficiency drove Professional Services sales growth.

India

Sales growth was driven by increased operator investments in mobile broadband infrastructure and Professional Services. Increased focus on network quality and cost optimization continued to drive strong sales growth for Managed Services. Support Solutions sales showed significant growth, driven by OSS and BSS.

North East Asia

Sales growth was driven by 4G deployments in Mainland China, partly offset by lower operator investments in Japan. Professional Services showed growth, supported by the acquisition of Sunrise Technologies’ telecom business.

South East Asia and Oceania

Sales increased, primarily driven by mobile broadband deployments across several markets. Professional Services sales developed favorably as operators focused on efficiency and network optimization. TV & Media showed a positive development during the year.

Other

Sales increased, driven by the Apple global patent license agreement and currency, as a majority of the IPR contracts are in US dollar. Broadcast services showed good growth. IPR licensing revenues amounted to SEK 14.4 (9.9) billion.

B.	Liquidity and Capital Resources

The information set forth under the following headings of the 2016 Swedish Annual Report is incorporated herein by reference:

•

Financials

•

Board of Directors’ report

•

Financial highlights – Cash flow

•

Financial highlights – Financial position

•

Financial highlights – Seasonality

•

Financial highlights – Capital expenditures

•

Notes to the consolidated financial statements

•

Note C19 – Interest-bearing liabilities

•

Note C20 – Financial risk management and financial instruments

•

Note C25 – Statement of cash flows

See “Item 8.B. Financial Information – Significant Changes” herein.

Balance sheet and other performance indicators for the years ended December 31, 2014 and 2015

Cash flow

Cash flow from operating activities was SEK 20.6 (18.7) billion. The positive earnings were somewhat offset by increased working capital, due to a business mix with a high share of coverage projects in Mainland China and emerging markets.

Days sales outstanding (DSO) decreased to 87 (105) days and Inventory turnover days remained stable at 64 days. Accounts payable days decreased to 53 (56) days. Provisions amounted to SEK 3.8 (4.4) billion at year end. Cash outlays of SEK 2.8 billion related to restructuring charges were made during the year.

Total investing activities amounted to SEK –8.0 billion. Investments in property, plant and equipment increased to SEK –8.3 (–5.3) billion driven by continued investments in new ICT centers in Sweden and Canada. Acquisitions amounted to SEK –2.2 (–4.4) billion.

Financing activities were impacted by dividend payouts of SEK –11.3 (–9.8) billion.

Financial position

Net cash decreased to SEK 18.5 (27.6) billion in 2015, despite stronger cash flow from operating activities, mainly due to increased investments in ICT centers and in new facilities in Santa Clara, California, as well as increased dividends.

Pension liabilities increased by SEK 2.3 billion following actuarial adjustments. The net cash position, excluding post-employment benefits (in the amount of SEK 22.7 billion) was SEK 41.2 (48.0) billion. Reported net cash was SEK 18.5 billion.

The average maturity of long-term borrowings as of December 31, 2015 was 4.8 years, compared with 5.7 years 12 months earlier. Ericsson has an unutilized Revolving Credit Facility of USD 2.0 billion. The facility expires in 2020.

Employees

In 2015, the number of employees decreased by 1,774. At the end of 2015, the total number of employees was 116,281 (118,055). Almost 15,000 employees joined Ericsson during the year and close to 17,000 employees left Ericsson, reflecting the natural attrition rate and ongoing company transformation.

Research and development, patents and licensing

In line with the global cost and efficiency program, the Company has decreased its R&D activities. The largest contribution to savings is a result of discontinuation of the modems operations. Approximately half of the global cost and efficiency program annual net savings of SEK 9 billion is estimated to come from operating expenses. R&D expenses amounted to SEK 34.8 (36.3) billion.

Research and development, patents and licensing


	2015			2014			2013
Expenses (SEK billion)		34.8			36.3			32.2
As percent of Net sales		14.1	%		15.9	%		14.2	%
Employees within R&D as of December 31 ¹⁾		23,700			25,700			25,300
Patents ¹⁾		39,000			37,000			35,000
IPR revenues, net (SEK billion)		14.4			9.9			10.6

1)	The number of employees and patents are approximate.

Seasonality

The Company’s sales, income and cash flow from operations vary between quarters, and are generally lowest in the first quarter of the year and highest in the fourth quarter. This is mainly a result of the seasonal purchase patterns of network operators.

Most recent five-year average seasonality


	First quarter			Second quarter			Third quarter			Fourth quarter
Sequential change, sales		–22	%		9	%		0	%		21	%
Share of annual sales		22	%		24	%		24	%		29	%

Off-balance sheet arrangements

There are currently no material off-balance sheet arrangements that have, or would be reasonably likely to have, a current or anticipated material effect on the Company’s financial condition, revenues, expenses, result of operations, liquidity, capital expenditures or capital resources.

Capital expenditures

For 2015, capital expenditures were SEK 8.3 (5.3) billion, representing 3.4% of sales. Expenditures are largely related to test sites and equipment for R&D, network operation centers and manufacturing and repair operations.

Investments have been made in three new global ICT centers. The centers will support R&D and services in developing and verifying solutions more efficiently and bringing innovation faster to the market. The first center, in Linköping, Sweden, was opened in 2014. The second center, in Rosersberg, Sweden, was opened in the beginning of 2016. The third center, in Montreal, Canada, is planned to be opened during the second quarter of 2016. In addition, Ericsson has invested in two buildings in Santa Clara, California with the purpose to consolidate Ericsson’s Silicon Valley operations.

Apart from these investments, Ericsson believes that the Company’s property, plant and equipment and the facilities the Company occupies are suitable for its present needs in most locations.

Annual capital expenditures are normally around 2% of sales. This corresponds to the needs for keeping and maintaining the current capacity level. The Board of Directors reviews the Company’s investment plans and proposals.

As of December 31, 2015, no material land, buildings, machinery or equipment were pledged as collateral for outstanding indebtedness.

Capital expenditures 2011–2015


SEK billion	2015			2014			2013			2012			2011
Capital -expenditures		8.3			5.3			4.5			5.4			5.0
Of which in -Sweden		2.6			2.4			1.9			1.3			1.7
Share of annual sales		3.4	%		2.3	%		2.0	%		2.4	%		2.2	%

C.	Research and Development, Patents and Licenses

The information set forth under the following headings of the 2016 Swedish Annual Report is incorporated herein by reference:

•

Other information

•

Five-year summary

•

Alternative Performance Measures (APMs)

•

The business

•

This is Ericsson

•

Business structure

•

Networks

•

IT & Cloud

•

Media

•

Global presence 24/7

•

Customer group – Industry and Society

•

Customer Group – IPR & Licensing

•

Financials – Board of Directors’ report

•

Financial highlights – Research and development, patents and licensing

•

Consolidated financial statements

•

Consolidated income statement

D.	Trend Information

The information set forth under the following headings of the 2016 Swedish Annual Report is incorporated herein by reference:

•

The Business

•

CEO dialogue

•

This is Ericsson

•

Profit improvement

•

This is the market

See “Item 8.B. Financial Information – Significant Changes” herein.

E.	Off-Balance Sheet Arrangements

The information set forth under the following headings of the 2016 Swedish Annual Report is incorporated herein by reference:

•

Financials

•

Board of Directors’ report

•

Financial highlights – Off-balance sheet arrangements

•

Notes to the consolidated financial statements

•

Note C14 – Trade receivables and customer finance, Transfers of financial assets

•

Note C24 – Contingent liabilities

F.	Tabular Disclosure of Contractual Obligations

The information set forth under the section “Financials – Notes to the consolidated financial statements – Note C31 – Contractual obligations” of the 2016 Swedish Annual Report is incorporated herein by reference.

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.	Directors and Senior Management

The information set forth under the following headings of the 2016 Swedish Annual Report is incorporated herein by reference:

•

Corporate Governance

•

Corporate Governance report 2016

•

Members of the Board of Directors

•

Members of the Executive Leadership Team

See “Item 8.B. Financial Information – Significant Changes” herein.

B.	Compensation

The information set forth under the following headings of the 2016 Swedish Annual Report is incorporated herein by reference:

•

Financials

•

Board of Directors’ report

•

Corporate governance – Remuneration

•

Notes to the consolidated financial statements

•

Note C17 – Post-employment benefits

•

Note C28 – Information regarding members of the Board of Directors, the Group management and employees

•

Corporate Governance

•

Corporate Governance report 2016

•

Remuneration to Board members

•

Remuneration report

See “Item 8.B. Financial Information – Significant Changes” herein.

C.	Board Practices

The information set forth under the following headings of the 2016 Swedish Annual Report is incorporated herein by reference:

•

Financials

•

Notes to the consolidated financial statements

•

Note C28 – Information regarding members of the Board of Directors, the Group management and employees – Comments to the table

•

Corporate Governance

•

Corporate Governance report 2016

•

Board of Directors – Composition of the Board of Directors

•

Committees of the Board of Directors – Audit committee

•

Committees of the Board of Directors – Remuneration committee

•

Remuneration report

•

The Remuneration Committee

See “Item 8.B. Financial Information – Significant Changes” herein.

D.	Employees

The information set forth under the following headings of the 2016 Swedish Annual Report is incorporated herein by reference:

•

The Business

•

The people

•

Financials

•

Board of Directors’ report

•

Financial Highlights – Employees

•

Notes to the Consolidated financial statements

•

Note C28 – Information regarding members of the Board of Directors, the Group management and employees – Employee numbers, wages and salaries

•

Other information

•

Five-year summary – Statistical data, year-end

We consider that our relationship with the labor unions that represent our employees is good.


Number of employees by region at year-end

	2016		2015		2014
North America		11,547		14,548		15,516
Latin America		9,513		10,412		11,066
Northern Europe & Central Asia ^1) 2)		19,136		20,700		21,633
Western & Central Europe ²⁾		13,646		12,220		12,617
Mediterranean ²⁾		12,578		12,702		13,387
Middle East		3,346		3,639		3,858
Sub-Saharan Africa		2,086		2,301		2,406
India		22,552		21,999		19,971
North East Asia		13,042		13,706		13,464
South East Asia & Oceania		4,018		4,054		4,137

Total		111,464		116,281		118,055

1) Of which in Sweden		15,303		17,041		17,580
2) Of which in EU		42,625		43,117		45,202

E.	Share Ownership

The information set forth under the following headings of the 2016 Swedish Annual Report is incorporated herein by reference:

•

Shareholders

•

Share information

•

Shareholders

•

Corporate Governance

•

Corporate Governance report 2016

•

Shareholders

•

Members of the Board of Directors

•

Members of the Executive Leadership Team

•

Remuneration report

•

Total remuneration in 2016

•

Financials – Notes to the consolidated financial statements

•

Note C28 – Information regarding members of the Board of Directors, the Group management and employees

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.	Major Shareholders

The information set forth under the following headings of the 2016 Swedish Annual Report is incorporated herein by reference:

•

Corporate Governance

•

Corporate Governance report 2016

•

Shareholders

•

Shareholders

•

Share information

•

Shareholders

B.	Related Party Transactions

The information set forth under the section “Financials – Notes to the consolidated financial statements – Note C29 – Related party transactions” of the 2016 Swedish Annual Report is incorporated herein by reference.

C.	Interests of Experts and Counsel.

Not applicable.

ITEM 8.

FINANCIAL INFORMATION

A.	Consolidated Statements and Other Financial Information.

The information set forth under the following headings of the 2016 Swedish Annual Report is incorporated herein by reference:

•

Financials

•

Board of Directors’ report

•

Legal proceedings

•

Parent Company – Proposed disposition of earnings

•

Consolidated financial statements

•

Notes to the consolidated financial statements

•

Report of independent registered public accounting firm

•

Other information

•

Five-year summary – Statistical data, year-end

See “Item 8.B. Financial Information – Significant Changes”, “Item 10.B. Memorandum and Articles of Association – Dividends” and “Item 17. Financial Statements”, herein.

Refer also to item 8.B herein

B.	Significant Changes

New segment structure from January 1, 2017

From January 1, 2017, financial reporting is done according to the new structure, i.e., by the new segments Networks, IT & Cloud and Media.

Börje Ekholm took office as CEO and President on January 16, 2017

On January 16, 2017, Ericsson announced that in connection with Börje Ekholm assuming the position as President and CEO of Ericsson, Jan Frykhammar, who had temporarily held the position as President and CEO, remained a member of the Executive Leadership Team and was appointed Executive Vice President and advisor to the CEO. Jan Frykhammar has been supporting Börje Ekholm during the transition period and has focused on corporate governance and efficiency. Magnus Mandersson remains Executive Vice President, advisor to the CEO, focusing on customer relationships, and a member of the Executive Leadership Team. Magnus Mandersson also remains Chairperson of four out of Ericsson’s ten regions. Carl Mellander remains acting Chief Financial Officer and a member of the Executive Leadership Team.

Ericsson issues two bonds of EUR 500 million each, maturing in 2021 and 2024, on February 24, 2017

Ericsson has successfully placed one Euro denominated 500 million four year bond with a fixed coupon rate of 0.875% and one Euro denominated 500 million seven year bond with a fixed coupon rate of 1.875% per year.

The bonds were issued under Ericsson’s Euro Medium Term Note Program (EMTN).

Joint bookrunners were Citi, Credit Agricole CIB and SEB and co-managers were Nordea, Standard Chartered and Swedbank.

The proceeds will be used to refinance debt maturing in 2017 and for general corporate purposes.

Ericsson presented focused business strategy

On March 28, 2017, Ericsson presented a focused business strategy to revitalize technology and market leadership, improve group profitability and enable customer success. The company announced that it will reallocate resources and increase investments in the following core portfolio areas: networks, digital services (OSS, BSS and telecom core) and Internet of Things (IoT).

In addition, the company will implement a refocused strategy for Managed Services to improve profitability and also explore strategic opportunities for the Media and Cloud infrastructure hardware businesses. When announced, the refocused strategy was estimated to have the following financial consequences in the short term: write down of assets to be made in Q1, 2017, with an estimated impact on operating income of SEK 3-4 b, restructuring charges estimated to approximately SEK 6-8 b. for 2017, of which approximately SEK 2 b. in Q1. The actual result reported in Q1 2017 was in line with the estimates: write down of assets were SEK 3.3 b., restructuring charges in Q1 2017 were SEK 1.7 b.

Separately, but in the same announcement, the company announced that it would make provisions of an estimated SEK 7-9 b. in Q1, triggered by recent negative developments related to certain large customer projects. The actual result recognized in Q1 2017 was SEK 8.4 b. and in line with the estimate.

In March, 2017, the Company made a restructuring provision of SEK 0.9 billion related to the reduction of operations in Borås and Kumla in Sweden. This was recognized in the first quarter of 2017.

Ericsson Simplifies Organization and Names Executive Team

In line with the business strategy announced on March 28, 2017, Ericsson has simplified its organizational structure by removing the two-tiered leadership structure, Executive Leadership Team and Global Leadership Team, and forming a single Executive Team. In addition, the geographical setup with ten regions has become five market areas, and the business areas were re-defined and reduced to three. The new Executive Team roles and the new organization took effect April 1, 2017.

The following Business Area and Market Area structure has been applied to Ericsson as of April 1, 2017:

•

Business Area Networks; Business Area Digital Services; Business Area Managed Services

•

Market Area North America; Market Area Europe & Latin America; Market Area Middle East & Africa; Market Area North East Asia; Market Area South East Asia, Oceania & India

Effective April 1, 2017, Ericsson’s Executive Team members are:

President and CEO – Börje Ekholm

Business Area Networks – Fredrik Jejdling, Senior Vice President, previously head of Business Unit Network Services

Business Area Managed Services – Peter Laurin, Senior Vice President, previously head of Region Northern Europe and Central Asia

Business Area Digital Services – Ulf Ewaldsson, Senior Vice President, previously head of Group Function Strategy & Technology

Market Area North America – Rima Qureshi, Senior Vice President, previously head of Region North America

Market Area Europe & Latin America – Arun Bansal, Senior Vice President, previously head of Business Unit Network Products

Market Area Middle East & Africa – Rafiah Ibrahim, Senior Vice President, previously head of Region Middle East

Market Area North East Asia – Chris Houghton, Senior Vice President, previously head of Region North East Asia

South East Asia, Oceania & India – Nunzio Mirtillo, Senior Vice President, previously head of Region Mediterranean

Technology & Emerging Business – Niklas Heuveldop, Senior Vice President, previously head of Group Function Sales

Finance & Common Functions – Carl Mellander, Senior Vice President, previously acting Head of Group Function Finance & Common Functions

Human Resources – MajBritt Arfert, Senior Vice President, previously acting Head of Group Function Human Resources

Marketing & Communications – Helena Norrman, Senior Vice President, previously in the same role

Sustainability & Corporate Responsibility – Elaine Weidman Grunewald, Senior Vice President, previously in the same role

Legal Affairs – Nina Macpherson, Senior Vice President, previously in the same role

Advisor to the CEO – Jan Frykhammar, Executive Vice President¸ previously in the same role

Advisor to the CEO – Magnus Mandersson, Executive Vice President, previously in the same role

Per Borgklint, Anders Lindblad, Jean-Philippe Poirault and Charlotta Sund left the Executive Leadership Team effective April 1, 2017.

Changes resolved in connection with the Annual General Meeting of shareholders (AGM) held on March 29, 2017

Decisions at the AGM 2017 included:

•

Payment of a dividend of SEK 1 per share

•

Re-election of Leif Johansson as Chairman of the Board of Directors

•

Re-election of other members of the Board of Directors: Nora Denzel, Börje Ekholm, Kristin Skogen Lund, Kristin S. Rinne, Sukhinder Singh Cassidy, Helena Sjernholm and Jacob Wallenberg

•

Election of new Board members: Jon Fredrik Baksaas, Jan Carlson and Eric A. Elzvik

•

Approval of Board of Directors’ fees:

•

Chairman: SEK 4,075,000 (unchanged)

•

Other non-employee Board members: SEK 990,000 each (unchanged)

•

Chairman of the Audit Committee: SEK 350,000 (unchanged)

•

Other non-employee members of the Audit Committee: SEK 250,000 each (unchanged)

•

Chairmen of the Finance and Remuneration Committees: SEK 200,000 each (unchanged)

•

Other non-employee members of the Finance and Remuneration Committees: SEK 175,000 each (unchanged)

•

Chairman of the newly-established Technology and Science Committee: SEK 200,000

•

Other non-employee members of the newly-established Technology and Science Committee: SEK 175,000 each

•

Approval for part of the Directors’ fees to be paid in the form of synthetic shares

•

Approval of Guidelines for remuneration to Group Management

•

Implementation of a Long-Term Variable Compensation Program 2017 for the members of the Global Leadership Team, including a share issue of and authorization to the Board to buy back 3,000,000 shares for the program.

Information on new Board members

Jon Fredrik Baksaas

Born 1954. Master of Science in Economics, NHH Norwegian School of Economics & Business Administration, Norway.

Board member: Svenska Handelsbanken AB.

Holdings in Ericsson: None.*

Principal work experience and other information: President and CEO of Telenor (2002-2015). Previous positions within the Telenor Group since 1989, including deputy CEO, Chief Financial Officer and CEO of TBK AS. Previous positions include CFO of Aker AS, finance director of Stolt Nielsen Seaway AS and controller at Det Norske Veritas, Norway and Japan. Member of the GSMA Board (2008-2016) and Chairman of the GSMA Board (2014-2016).

Jan Carlson

Born 1960. Master of Science degree in Engineering Physics and Electrical Engineering, the University of Linköping, Sweden.

Board Chairman: Autoliv Inc.

Board member: BorgWarner Inc., Teknikföretagen, The Confederation of Swedish Enterprise and Trelleborg AB.

Holdings in Ericsson: 7,900 Class B Shares.*

Principal work experience and other information: President and CEO of Autoliv Inc. since 2007 and Chairman of Autoliv Inc. since 2014. Previous positions within the Autoliv Group since 1999, including President Autoliv Europe, Vice President Engineering of Autoliv and President Autoliv Electronics. Previous positions include President of Saab Combitech and of Swedish Gate Array.

Eric A. Elzvik

Born 1960. Master of Science in Business Administration, Stockholm School of Economics, Sweden.

Board member: IMD Foundation, Lausanne and the Swiss Swedish Chamber of Commerce, Zurich, Switzerland.

Holdings in Ericsson: 10,000 Class B shares*.

Principal work experience and other information: Chief Financial Officer and member of the Group Executive Committee of ABB Ltd (2013-2017). Division CFO ABB Discrete Automation & Motion (2010-2012) and division CFO Automation Products Division (2006-2010). Previous positions within the ABB Group since 1984, including senior management positions within finance, mergers & acquisitions and new ventures.

*	The holdings in Ericsson are as of the date of the notice convening the Annual General Meeting and includes holdings by related persons as well as holdings of ADS, if applicable.

The minutes from the AGM 2017 are available on Ericsson’s website.

The employee representatives appointed as of March 29, 2017 are: Kjell-Åke Soting, Roger Svensson and Karin Åberg, with the deputies Torbjörn Nyman, Anders Ripa and Loredana Roslund.

The Nomination Committee’s independence assessment

Before the AGM 2017, the Nomination Committee considered that at least the following Board members were independent in respect of all applicable independence requirements:

a. Jon Fredrik Baksaas

b. Jan Carlson

c. Nora Denzel

d. Eric A. Elzvik

e. Leif Johansson

f. Kristin Skogen Lund

g. Kristin S. Rinne

h. Sukhinder Singh Cassidy

New Board Committee on Technology and Science and new Committee members

At the statutory Board meeting held in connection with the Annual General Meeting 2017, the Board resolved to establish a new Board Committee on Technology and Science and the following Board members were appointed members of the new Committee: Kristin S. Rinne (Chairman), Jan Carlson, Nora Denzel and Roger Svensson (employee representative).

The tasks of the Committee include monitoring and preparing for consideration and/or resolution of the Board various matters relating to technology strategy and direction, technical matters, technology ecosystem and science direction.

The Board members appointed to the other Board Committees as of March 29, 2017 are:

Audit Committee: Eric A. Elzvik (Chairman), Nora Denzel, Kristin Skogen Lund and Karin Åberg (employee representative) Finance Committee: Leif Johansson (Chairman), Helena Stjernholm, Jacob Wallenberg and Roger Svensson (employee representative) Remuneration Committee: Leif Johansson (Chairman), Jon Fredrik Baksaas, Sukhinder Singh Cassidy and Kjell Åke Soting (employee representative)”.

Results

for the First Quarter of 2017

For information about our results for the first quarter of 2017, see the report on Form 6-K filed with the SEC on April 26 2017, which is incorporated herein by reference.

ITEM 9.

THE OFFER AND LISTING

A.	Offer and Listing Details

The information set forth under the section “Shareholders – Share information – Share and ADS prices” of the 2016 Swedish Annual Report is incorporated herein by reference.

B.	Plan of Distribution

Not applicable.

C.	Markets

The information set forth the section “Shareholders – Share information – Share trading” of the 2016 Swedish Annual Report is incorporated herein by reference.

D.	Selling Shareholders

Not applicable.

E.	Dilution

Not applicable.

F.	Expenses of the Issue

Not applicable.

ITEM 10.

ADDITIONAL INFORMATION

A.	Share Capital

Not applicable.

B.	Memorandum and Articles of Association

Telefonaktiebolaget LM Ericsson is registered under no. 556016–0680 in the Company Register kept by the Swedish Companies Registration Office. Our Company’s objective and purposes are described in article 2 of the Articles of Association, as follows: The objects of the Company are to, directly or indirectly, develop, construct, produce, sell and deliver and in other forms carry on trade and other commercial business related to goods, products and other equipment as well as maintenance and other services based on telecommunication and radio technology and other technologies for transference, transmission and other communications of speech, data, images, text, other kinds of information and means of payment and to carry on other activities consistent therewith.

Our Articles of Association do not stipulate anything regarding:

•

a director’s power to vote on a proposal, arrangement, or contract in which the director is materially interested;

•

our directors’ power to vote for compensation to themselves;

•

our directors’ borrowing powers;

•

retirement rules for our directors; or

•

the number of shares required for a director’s qualification.

Applicable provisions are found in the Swedish Companies Act (2005:551) (the “Swedish Companies Act”), as referred to in “Certain Powers of Directors and the President” below.

In addition to being of legal age, there are no age limit restrictions for directors and they are not required to own any shares in the Company.

Share Capital, Increases of Share Capital and Preferential Rights of Shareholders

The Articles of Association of Ericsson provide that the share capital of the Company may not be less than SEK 6,000,000,000 nor more than SEK 24,000,000,000, and that the number of shares in the Company shall amount to no less than 3,000,000,000 and no more than 12,000,000,000. The registered share capital is SEK 16,655,758,678 and the Company has in total issued 3,331,151,735 shares.

The Company’s shares are divided into three series: Class A shares, Class B shares and Class C shares; however, no Class C shares are currently outstanding. Under the Swedish Companies Act, shareholders must approve each issue of additional shares either by deciding on the share issue at a shareholders’ meeting, or by a shareholders’ approval of a decision on a share issue by the Board, or by giving an authorization to the Board to decide about a share issue. If we decide to issue new Class A, Class B and Class C shares by means of a cash issue, or an issue against payment through set-off of claims, Class A, Class B and Class C shareholders (except for Ericsson and its subsidiaries, in the event they hold shares in Ericsson) have a primary preferential right to subscribe for new shares of the same type in relation to the number of shares previously held by them. Shares not subscribed for through a preferential right shall be offered to all shareholders for subscription on a pro rata basis. If we decide to issue new shares of only one series by means of a cash issue or an issue against payment through set-off of claims, all shareholders, regardless of whether their shares are Class A, Class B or Class C, are entitled to a preferential right to subscribe for new shares in proportion to the number of shares previously held by them. Shareholders may vote to waive shareholders’ preferential rights at a general meeting.

If we decide to issue warrants or convertibles through a cash issue or an issue against payment through set-off of claims, the shareholders have preferential rights to subscribe to warrants as if the issue were of the shares that may be subscribed to pursuant to the warrant and, respectively, preferential rights to subscribe to convertibles as if the issue were of the shares that the convertibles may be converted to.

The above does not constitute any restriction to waive the shareholders’ preferential rights when deciding on either an issue of shares, warrants or convertibles by means of a cash issue or an issue against payment through set-off of claims.

Dividends

Our Class A and Class B shareholders have the same right to dividends. Class C shareholders do not have any right to dividends, as described in article 6 of our Articles of Association. No Class C shares are currently outstanding.

Under Swedish law, only a general meeting of shareholders may decide on payment of dividends, which may not exceed the amount proposed by the Board of Directors (except in certain limited circumstances), and may only be paid from funds legally available for that purpose. Under Swedish law, no interim dividends may be paid in respect of any fiscal period for which audited financial statements of the company have not yet been adopted by the annual general meeting of shareholders. The market practice in Sweden is most often for dividends to be paid annually. Under the Swedish Companies Act, dividends to shareholders and other transfers of value from a company—such as purchases of own shares (see below)—may only be made in case the company’s restricted equity remains fully covered after the transfer of value has been made. The calculation shall be based upon the most recently adopted

balance sheet, and any changes in the restricted equity that has occurred after the balance sheet date shall be taken into account. In addition, dividends to shareholders and other transfers of value from the company may only be made if this is justifiable taken into account the type of business activities of the company, their scope and risks related thereto and the company’s need for financial resources, its liquidity and financial position. In respect of parent companies, also the business activities of the group, their scope and risks related thereto and the group’s need for financial resources, its liquidity and financial position shall be taken into account.

The Company’s shares are registered in the computerized book-entry share registration system administered by Euroclear Sweden AB (“Euroclear”). The rights attached to shares eligible for dividends accrue to those persons whose names are recorded in the register of shareholders on the record day. The dividends are then sent to a specified account as directed by the person registered with Euroclear, or to the address of that person. The relevant record day must, in most circumstances, be specified in the resolution declaring a dividend or resolving upon a capital increase or any similar matter in which shareholders have preferential rights, or the Board of Directors must be authorized to determine the relevant record day.

Where the registered holder is a nominee, the nominee receives, for the account of the beneficial owner, dividends and, on issues of shares with preferential rights for the shareholders, shares, as well as rights. Dividends are remitted in a single payment to the nominee who is responsible for the distribution of such dividends to the beneficial owner. A similar procedure is adopted for share issues. Specific authority to act as a nominee must be obtained from Euroclear. At the request of Euroclear, the nominee must provide information about all beneficial holders of shares to Euroclear. Euroclear is required to keep a register with regard to any holding on behalf of a single beneficial owner in excess of 500 shares in any one company. This list is prepared every third month and must reveal the names of the beneficial owner and be open to public inspection.

Voting

In a general meeting of Ericsson, each Class A share shall carry one vote, each Class B share one tenth of one vote and each Class C share one-thousandth of one vote.

We are required to publish notices to attend annual general meetings no earlier than six weeks and no later than four weeks prior to the annual general meeting and the same notice period requirements apply regarding extraordinary general meetings concerning changes in our articles of association. Notices to attend other types of extraordinary general meetings at Ericsson must be published no earlier than six weeks and no later than three weeks prior to the general meeting.

Directors are elected during the annual general meeting for a period of one year at a time and do not stand for reelection at staggered intervals.

A shareholder may attend and vote at the meeting in person or by proxy. For companies whose shares are registered in a central securities depositary register, proxies are valid for up to five years from the date of issuance. Any shareholder wishing to attend a general meeting must notify us no later than on the day specified in the notice. We are required to accept all notifications of attendance received at least five business days (Saturdays normally included) prior to the meeting. A person designated in the register as a nominee (including the depositary of the ADSs) is not entitled to vote at a general meeting, nor is a beneficial owner whose share is registered in the name of a nominee (including the depositary of the ADSs) unless the beneficial owner first arranges to have such owner’s own name entered in the register of shareholders maintained by Euroclear no later than the designated record day.

Under the Swedish Companies Act, elections are determined by a plurality vote. Resolutions, other than elections, are passed by a simple majority of votes cast at the meeting with the chairman of the meeting having a decisive vote, unless otherwise required by law or a company’s articles of association. Under the Swedish Companies Act, certain resolutions require special quorums and majorities, including, but not limited to, the following:

a resolution to amend the articles of association requires a majority of two-thirds of the votes cast as well as two-thirds of the shares represented at the meeting, except in those circumstances described in b—d below;

a resolution to amend the articles of association which reduces any shareholder’s rights to profits or assets, restricts the transferability of shares or alters the legal relationship between shares, normally requires the unanimous approval of the shareholders present at the meeting and who hold nine-tenths of all outstanding shares;

a resolution to amend the articles of association for the purpose of limiting the number of shares with which a shareholder may vote at a general meeting or allocating part of the net profit for the fiscal year to a restricted fund or limiting the use of the company’s profits or assets in a liquidation or dissolution, normally requires the approval of shareholders representing two-thirds of the votes cast and nine-tenths of the shares represented at the meeting;

a resolution of the kind referred to under B or C above may, however, be taken with a lower supermajority requirement if the amendments referred to therein will only adversely affect specific shares or classes of shares. In such cases, the requirement under a above will apply together with the following separate supermajority: (a) where only a class of shares is adversely affected, approval of the owners of one-half of all shares of such class and nine-tenths of the shares of such class represented at the meeting, or (b) where the shares adversely affected do not constitute a class of shares, the unanimous approval of all such affected outstanding shares present at the meeting and who hold nine-tenths of all outstanding shares adversely affected;

a resolution to issue, approve or authorize the issuance for cash of new shares, warrants or convertibles with a deviation from the preferential right for existing shareholders requires a two-thirds majority of votes cast at the meeting as well as two-thirds of the shares represented at the meeting;

a resolution to reduce the outstanding share capital requires a two-thirds majority of votes cast at the meeting as well as two-thirds of the shares represented at the meeting. In case there are several classes of shares in a company, the above described majority requirement shall apply also within each share class represented at the meeting and for which the rights of the shares are adversely affected; and

a resolution to approve a merger requires a two-thirds majority of the votes cast at the meeting and two-thirds of the shares represented at the meeting (however, under certain circumstances a higher majority is required).

At a general meeting of shareholders, a shareholder or proxy for one or more shareholders may cast full number of votes represented by the holder’s shares.

Purchase of Own Shares

A Swedish public limited liability company whose shares are traded on a regulated market place within the European Economic Area (“EEA”) or a market place comparable to a regulated market place outside the EEA is entitled to purchase its own shares under certain conditions. A purchase by us of our own shares may take place only if (a) the purchase has been decided upon by a general meeting of shareholders or the Board has been authorized by a general meeting of shareholders, in both cases by a two thirds majority of votes cast at the meeting as well as two-thirds of the shares represented at the meeting, (b) the purchase is effected on a regulated market place within the EEA or a market place comparable to a regulated market place outside the EEA (in the latter case with the approval of the Swedish Financial Supervisory Authority the “SFSA”) or pursuant to an offer to all shareholders or holders of a specific class of shares, (c) the Company’s restricted equity will still be fully covered and the purchase is justifiable taken into account the type of business activities of the Company and the group, their scope and risks related thereto and the Company’s and the group’s need for financial resources, their liquidity and financial position, and (d) we and our subsidiaries do not hold or, as a result of purchase, will not hold in excess of 10% of all our outstanding shares. As of December 31, 2016, the Company held an aggregate of 62,192,390 treasury stock of Class B shares.

Investment Restrictions

There are no limitations imposed by Swedish law or by our Articles of Association in respect of the rights of non-residents or foreign persons to purchase, own or sell securities issued by us.

There are, however, certain flagging and ownership examination rules that apply, irrespective of nationality.

Pursuant to the Swedish Financial Instruments Trading Act any change in a holding of shares, depository receipts with voting rights or financial instruments that entitle the holder to acquire shares in issue in a Swedish limited liability company whose shares are admitted for trading on a regulated market place within the EEA shall be reported

by the holder to the company and the SFSA, where the change entails that the holder’s portion of all shares or votes in the company reaches, exceeds or falls below any of the limits of 5, 10, 15, 20, 25, 30, 50, 66 2/3 or 90 per cent. Such a change should, as a main rule, be reported not later than three trading days following the day on which the party with a duty to report has entered into an agreement for the acquisition or transfer of shares or any other change to the shareholding has occurred.

In addition, the EU Market Abuse Regulation requires, among other things, that the Company holds a register of all persons discharging managerial responsibilities and of persons closely associated with them. The Company and the SFSA must be notified of certain transactions conducted by the aforementioned persons. Such notifications shall be made no later than three business days after the date of the transaction.

C.	Material Contracts

The information set forth under the following headings of the 2016 Swedish Annual Report is incorporated herein by reference:

•

Financials – Board of Directors’ report

•

Material contracts

D.	Exchange Controls

There is no Swedish legislation affecting the import or export of capital or the remittance of dividends, interest or other payments to non-resident holders of our securities, except that, subject to the provisions in any tax treaty, dividends are subject to withholding tax.

E.	Taxation

General

The taxation discussion set forth below does not purport to be a complete analysis or listing of all potential tax effects relevant to the acquisition, ownership or disposition of Class B shares or ADSs. The statements of United States and Swedish tax laws set forth below are based on the laws in force as of the date of this report and may be subject to any changes in United States or Swedish law, and in any double taxation convention or treaty between the United States and Sweden, occurring after that date, which changes may then have retroactive effect.

Specific tax provisions may apply for certain categories of taxpayers. Your tax treatment if you are a holder of Class B shares or ADSs depends in part on your particular situation. If you are a holder of Class B shares or ADSs, you should therefore consult a tax advisor as to the tax consequences relating to your particular circumstances resulting from the ownership of Class B shares or ADSs.

The tax consequences to holders of ADSs, as discussed below, apply equally to holders of Class B shares.

Certain Swedish Tax Considerations

This section describes the material Swedish income and net wealth tax consequences for a holder of ADSs or Class B shares who is not considered to be a Swedish resident for Swedish tax purposes. This section applies to you only if you are a holder of portfolio investments representing less than 10% of capital and votes and is not applicable if the ADSs or Class B shares pertain to a permanent establishment or fixed place of business in Sweden.

Taxation on Capital Gains

Generally, non-residents of Sweden are not liable for Swedish capital gains taxation with respect to the sale of ADSs or Class B shares. However, under Swedish tax law, capital gains from the sale of shares in Swedish companies and certain other securities by an individual may be taxed in Sweden at a rate of 30% if the seller has been a resident of Sweden or has lived permanently in Sweden at any time during the year of the sale or the 10 calendar years preceding the year of the sale (absent treaty provisions to the contrary). The provision is applicable to ADSs or Class B shares. From January 1, 2008, the rule has been extended so that it also applies to shares in foreign companies, provided that the shares were acquired during the time that the person was liable to tax in Sweden.

This provision may, however, be limited by tax treaties that Sweden has concluded with other countries. Under the tax treaty between Sweden and the United States (the “U.S. Tax Treaty”), this provision applies for ten years from the date the individual became a non-resident of Sweden.

Taxation on Dividends

A Swedish dividend withholding tax at a rate of 30% is imposed on dividends paid by a Swedish corporation, such as us, to non-residents of Sweden. The same withholding tax applies to certain other payments made by a Swedish corporation, including payments as a result of redemption of shares and repurchase of stock through an offer directed to its shareholders. Exemption from the withholding tax or a lower tax rate may apply by virtue of a tax treaty. Under the U.S. Tax Treaty, the withholding tax on dividends paid on portfolio investments to eligible U.S. holders is reduced to 15%.

Under all Swedish tax treaties, except the tax treaty with Switzerland, withholding tax at the applicable treaty rate should be withheld by the payer of the dividends. With regard to dividends paid from shares in corporations registered with the Euroclear Sweden (such as our shares), a reduced rate of dividend withholding tax under a tax treaty is generally applied at the source by the Euroclear Sweden or, if the shares are registered with a nominee, the nominee, as long as the person entitled to the dividend is registered as a non-resident and sufficient information regarding the tax residency of the beneficial owner is available to the Euroclear Sweden or the nominee.

In those cases where Swedish withholding tax is withheld at the rate of 30% and the person who received the dividends is entitled to a reduced rate of withholding tax under a tax treaty, a refund may be claimed from the Swedish tax authorities before the end of the fifth calendar year following the year that the distribution was made.

Taxation on Interest

No Swedish withholding tax is payable on interest paid to non-residents of Sweden.

Net Wealth Taxation

The Swedish net wealth tax has been abolished from January 1, 2007.

Certain United States Federal Income Tax Consequences

The following discussion is a summary of the material United States federal income tax consequences relevant to the ownership and disposition of ADSs or Class B shares. This discussion is based on the tax laws of the United States (including the Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing and proposed regulations thereunder, published rulings and court decisions) as in effect on the date hereof, all of which are subject to change, possibly with retroactive effect. The discussion is not a full discussion of all tax considerations that may be relevant to the ownership and disposition of ADSs or Class B shares, and does not address the Medicare tax on net investment income or the effects of any state, local or foreign tax laws. The discussion applies only if you will hold the ADSs and/or the Class B shares as capital assets and you use the USD as your functional currency. It does not deal with the tax treatment of investors subject to special rules, such as grantor trusts, real estate investment trusts, regulated investment companies, banks, brokers or dealers in securities or currencies, traders in securities that elect to use a mark-to-market method of recording for their securities holdings, financial institutions, insurance companies, tax-exempt entities, investors liable for alternative minimum tax, holders (either actually or constructively) of 10% or more of the voting power of our shares, persons holding ADSs and/or Class B shares as part of a hedging, straddle, conversion or constructive sale transaction and persons who are resident or ordinarily resident in Sweden. In addition, investors holding ADSs and/or Class B shares indirectly through partnerships are subject to special rules not discussed below. You should consult your own tax advisors about the United States federal, state, local and foreign tax consequences to you of the ownership and disposition of the ADSs or Class B shares.

The discussion below applies to you only if you are a beneficial owner of ADSs and/or Class B shares not resident in Sweden for purposes of the U.S. Tax Treaty and you are, for United States federal income tax purposes, (1) a citizen or resident of the United States, (2) a corporation or any other entity treated as a corporation that is organized in or under the laws of the United States or its political subdivisions, including the District of Columbia, (3) a trust if

all of the trust’s substantial decisions are subject to the control of one or more United States persons and the primary supervision of the trust is subject to a United States court, or if a valid election is in effect with respect to the trust to be taxed as a United States person, or (4) an estate the income of which is subject to United States federal income taxation regardless of its source.

The discussion below assumes that the representations contained in the deposit agreement governing the ADSs are true and that the obligations in the deposit agreement and any related agreement will be complied with in accordance with the terms. If you hold ADSs, you will be treated as the holder of the underlying Class B shares represented by those ADSs for United States federal income tax purposes.

Dividends

Subject to the passive foreign investment company rules discussed below, the gross amount of dividends paid (before reduction for any Swedish withholding taxes) with respect to the ADSs or Class B shares generally will be included in your gross income as ordinary income from foreign sources to the extent paid out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes). Distributions in excess of earnings and profits will be treated as a non-taxable return of capital to the extent of your adjusted tax basis in the ADSs or Class B shares and thereafter as capital gain. The dividends will not be eligible for the dividends received deduction available to corporations in respect of dividends received from other U.S. corporations. The amount of any dividend paid in SEK will be the USD value of the dividend payment based on the exchange rate in effect on the date of receipt (or constructive receipt) by you, in the case of Class B shares, or by the depositary, in the case of ADSs, whether or not the payment is converted into USD at that time. Your tax basis in the SEK received will equal such USD amount. Gain or loss, if any, recognized on a subsequent sale or conversion of the SEK will be U.S. source ordinary income or loss.

If you are a non-corporate holder of ADSs or Class B shares, dividends you receive on the ADSs or Class B shares may be taxed at the lower applicable long-term capital gains rate provided that (1) we are not a passive foreign investment company (as discussed below) for either our taxable year in which the dividend was paid or the preceding taxable year, (2) certain holding period requirements are met, (3) you are not under any obligation to make related payments with respect to substantially similar or related property and (4) either (a) in the case of ADSs our ADSs continue to be listed on the Nasdaq Stock Market (or a national securities exchange that is registered under section 6 of the Securities Exchange Act of 1934, as amended) or (b) we are eligible for the benefits of the U.S. Tax Treaty. You should consult your own tax advisors regarding the availability of the lower rate for dividends paid with respect to ADSs or Class B shares.

Subject to certain limitations, you will generally be entitled to receive credit against your United States federal income tax liability (or a deduction against your United States federal taxable income) with respect to any Swedish tax withheld in accordance with the U.S. Tax Treaty and paid over to Sweden. If a refund of the tax withheld is available to you under the laws of Sweden or under the U.S. Tax Treaty, the amount of tax withheld that is refundable will not be eligible for such credit against your United States federal income tax liability (and will not be eligible for the deduction in computing your United States federal taxable income). For foreign tax credit limitation purposes, dividends will be income from sources without the United States, and will generally be treated as “passive category income” (or, in the case of certain holders, “general category income”).

Sale or Exchange of ADSs or Class B shares

Subject to the passive foreign investment company rules discussed below, you will generally recognize capital gain or loss on the sale or other disposition of the ADSs or Class B shares equal to the difference between the USD value of the amount realized and your adjusted tax basis (determined in USD) in the ADSs or Class B shares. Such gain or loss will generally be long-term capital gain or loss if you have held the ADSs or Class B shares for more than one year, and will generally be treated as arising from U.S. sources for foreign tax credit limitation purposes. If you are a non-corporate holder of ADSs or Class B Shares, long-term capital gains are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations.

The amount realized on a disposition of ADSs or Class B shares for cash will generally be the amount of cash you receive for the ADSs or Class B shares (which, in the case of payment in a non-U.S. currency, will equal the USD value of the payment received determined on (a) the date of receipt of payment if you are a cash basis taxpayer and (b) the date of disposition if you are an accrual basis taxpayer). If the ADSs or Class B shares are treated as traded on an

“established securities market,” if you are a cash basis taxpayer (or, if you are an accrual basis taxpayer, if you so elect) you will determine the USD value of the amount realized by translating the amount received at the spot rate of exchange on the settlement date of the sale.

You will have a tax basis in any foreign currency received equal to the USD value thereof on the date of receipt. Any gain or loss you realize on a subsequent sale or conversion of foreign currency will be U.S. source ordinary income or loss.

Passive Foreign Investment Company Status

A non-U.S. corporation is a passive foreign investment company (a “PFIC”) in any taxable year in which, after taking into account the income and assets of certain subsidiaries, either (a) at least 75% of its gross income is passive income or (b) at least 50% of the quarterly average value of its assets is attributable to assets that produce or are held to produce passive income. Based on the market value of our shares, the composition of our assets and income and our operations, we believe we were not a PFIC during the year 2016. However, whether or not we will be considered a PFIC will depend on the nature and source of our income and the composition and value of our assets, as determined from time to time. If we are treated as a PFIC, we will not provide information necessary for the “qualified electing fund” election as the term is defined in the relevant provisions of the Code. You should consult your own tax advisors about the consequences of our potential classification as a PFIC.

If we were classified as a PFIC with respect to your ADSs or Class B shares for any taxable year we would generally continue to be a PFIC (unless certain conditions are met) and you would be subject to special rules with respect to:

•

any gain realized on the sale or other disposition of ADSs or Class B shares; or

•

any other “excess distribution” made to you (generally, any distributions to you in respect of ADSs or Class B shares during a single taxable year that are, in the aggregate, greater than 125% of the average annual distributions received by you in respect of ADSs or Class B shares during the three preceding taxable years or, if shorter, your holding period for ADSs or Class B shares).

Under these rules:

•

the gain or any other excess distribution would be allocated ratably over your holding period for ADSs or Class B shares;

•

the amount allocated to the taxable year in which the gain or excess distribution was realized and any year before we became a PFIC would be taxable as ordinary income and

•

the amount allocated to each prior year, other than the current year and any taxable year prior to the first taxable year in which we were a PFIC, would be subject to tax at the highest applicable marginal tax rate in effect for each such year; and an interest charge would be imposed.

If we are a PFIC for any taxable year, you will also be deemed to own shares in any of our subsidiaries that are also PFICs in such a year. As an alternative to the special rules described above, holders of “marketable stock” in a PFIC may elect mark-to-market treatment with respect to their ADSs or Class B shares. ADSs or Class B shares will not be considered marketable stock unless they are regularly traded on a qualified exchange or other market. If the mark-to-market election is available and you elect mark-to-market treatment you will, in general, include as ordinary income each year an amount equal to the increase in value of your ADSs or Class B shares for that year (measured at the close of your taxable year) and will generally be allowed a deduction for any decrease in the value of your ADSs or Class B shares for the year, but only to the extent of previously included mark-to-market income. In addition, any gain you recognize upon the sale or other disposition of the ADSs or Class B shares will be treated as ordinary income and any loss will be treated as ordinary loss, but only to the extent of previously included mark-to-market income. Any loss in excess of previously included mark-to-market income will be treated as a capital loss. However, a mark-to-market election would likely be unavailable with respect to your proportionate share in any of our subsidiaries that are PFICs.

If you own ADSs or Class B shares during any year in which we are a PFIC, you will generally be required to make an annual return on IRS Form 8621.

Information Reporting and Backup Withholding

In general, information reporting requirements will apply to dividends paid in respect of ADSs or Class B shares and the proceeds received on the sale or exchange of the ADSs or Class B shares within the United States or by a broker with certain United States connections. Backup withholding may apply to payments to you of dividends paid in respect of ADSs or Class B shares or the proceeds of a sale or other disposition of ADSs or Class B shares if you fail to provide an accurate taxpayer identification number (certified on IRS Form W–9) or, upon request, to certify that you are not subject to backup withholding, or otherwise to comply with the applicable requirements of the backup withholding rules. The amount of any backup withholding from a payment to you will be allowed as a credit against your United States federal income tax liability and a refund of any excess amount withheld under the backup withholding rules may be obtained by filing the appropriate claim for refund with the Internal Revenue Service and furnishing any required information.

Additional Reporting Requirements

Certain holders who are individuals may be required to report information relating to an interest in ADSs or Class B shares, subject to certain exceptions (including an exception for ADSs or Class B shares held in accounts maintained by certain financial institutions). Holders should consult their tax advisors regarding the effects, if any, of these requirements on their ownership and disposition of ADSs or Class B shares.

F.	Dividends and Paying Agents

Not applicable.

G.	Statement by Experts

Not applicable.

H.	Documents on Display

Annual reports and other information are filed with, or furnished to, the SEC in the United States, pursuant to the rules and regulations that apply to foreign private issuers. Electronic access to these documents may be obtained from the SEC’s website, www.sec.gov, where they are stored in the EDGAR database.

I.	Subsidiary Information

See “Item 4.C. Information on the Company – Organizational Structure.”

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A.	Quantitative information about market risk

The information set forth under the section “Financials – Notes to the consolidated financial statements – Note C20 – Financial risk management and financial instruments” of the 2016 Swedish Annual Report is incorporated herein by reference.

B.	Qualitative information about market risk

The information set forth under the following headings of the 2016 Swedish Annual Report is incorporated herein by reference:

•

Financials – Board of Directors’ report

•

Risk management

•

Notes to the consolidated financial statements

•

Note C20 – Financial risk management and financial instruments

•

Corporate Governance

•

Corporate Governance report 2016

•

Management – Risk management

C.	Interim periods

Not applicable.

D.	Safe harbor

Not applicable.

E.	Small business issuers

Not applicable.

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

A.	Debt Securities

Not applicable.

B.	Warrants and Rights

Not applicable.

C.	Other Securities

Not applicable.

D.	American Depositary Shares

Depositary fees, charges and payments

On October 24, 2016, Ericsson and the depositary of our ADSs, Deutsche Bank Trust Company America (“Deutsche Bank”) agreed to an amendment to the Deposit Agreement with Deutsche Bank and holders of our ADRs. The Deposit Agreement, as amendment, is filed as an exhibit to this Annual Report on form 20-F. The disclosure below reflects the amendment.

Fees and charges payable by ADS holders


	Service	Rate	By whom paid
1)	Receipt of deposits and issuance of receipts	Up to USD 5 per 100 American Depositary Shares of fraction thereof	Party to whom receipts are issued
2)	Delivery of deposited shares against surrender of receipts	Up to USD 5 per 100 American Depositary Shares or fraction thereof	Party surrendering receipts
3)	Distribution of Cash Dividends and Cash Proceeds	Up to USD 3 per 100 American Depositary Shares	All holders of American Depositary Shares
4)	Administration of the ADSs	Up to USD 3 per 100 American Depositary Shares per annum	All holders of American Depositary Shares

Except as otherwise provided in the Deposit Agreement, any and all other expenses of the depositary, including without limitation, expenses or charges for printing, stationery, postage, insurances, cables, etc, are to be borne by the depositary, or by the Company in accordance with agreements entered into from time to time with the Company.

Fees payable by the Depositary to the Issuer

Deutsche Bank has agreed to pay Ericsson a yearly fixed amount for revenues collected by Deutsche Bank as a result of charging issuance and cancellations fees and dividend or administrative fees from our ADS holders. In 2016, such amount received by Ericsson totalled approximately USD 8 million.

Deutsche Bank has further agreed to waive the costs associated with the administration of the ADS Program and reporting services. In 2016, the total amount of such expenses was approximately USD 78,000.

PART II

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

ITEM 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

ITEM 15.

CONTROLS AND PROCEDURES

A.	Disclosure Controls and Procedures

The information set forth under the section “Corporate Governance – Corporate Governance report 2016 – Internal control over financial reporting 2016 – Disclosure controls and procedures” of the 2016 Swedish Annual Report is incorporated herein by reference.

B.	Management’s Annual Report on Internal Control Over Financial Reporting

The information set forth under the section “Financials – Management’s report on internal control over financial reporting” of the 2016 Swedish Annual Report is incorporated herein by reference.

C.	Attestation Report of the Registered Public Accounting Firm

The information set forth under the section “Financials – Report of independent registered public accounting firm” of the 2016 Swedish Annual Report is incorporated herein by reference.

D.	Changes in Internal Control Over Financial Reporting

The information set forth under the following headings of the 2016 Swedish Annual Report is incorporated herein by reference:

•

Corporate Governance

•

Corporate Governance report 2016

•

Internal control over financial reporting 2016 – Internal control over financial reporting

•

Financials

•

Management’s report on internal control over financial reporting

ITEM 16.

[RESERVED]

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

The information set forth under the section “Corporate Governance – Corporate Governance report 2016 – Committees of the Board of Directors – Audit Committee – Members of the Audit Committee” of the 2016 Swedish Annual Report is incorporated herein by reference.

ITEM 16B.

CODE OF ETHICS

The information set forth under the following headings of the 2016 Swedish Annual Report is incorporated herein by reference:

•

The business

•

Sustainability and corporate responsibility

•

Financials – Board of Directors’ report

•

Corporate Governance – Business integrity

•

Corporate Governance

•

Corporate governance report 2016

•

Regulation and Compliance – Code of business ethics

Our Code of Business Ethics is included on our web site at www.ericsson.com/code-of-business-ethics . We intend to disclose any waivers to or amendments of our Code of Business Ethics for the benefit of our executive officers on our website to the extent public disclosure is required under applicable rules.

ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information set forth under the Section “Financials – Notes to the consolidated financial statements – Note C30 – Fees to auditors” of the 2016 Swedish Annual Report is incorporated herein by reference.

Audit committee pre-approval policies and procedures

The Audit Committee reviews and approves the scope of audits to be performed by external and internal auditors and analyzes their results and costs. The Committee keeps the Board of Directors informed about the external and internal auditors’ performance. It also makes recommendations to the Nomination Committee regarding the external auditor’s election and fees. In order to ensure the external auditor’s independence, the Audit Committee has established pre-approval policies and procedures for non-audit services to be performed by the external auditor. Pre-approval authority may not be delegated to management. The policies and procedures include a list of prohibited services and services that require pre-approval by the Committee. Such services fall into two broad categories:

•

General pre-approval – certain services regarding taxes, transactions, risk management, business improvement, attestation and accounting services and the so called general services (other than prohibitted services) have received general pre-approval by the Audit Committee, provided that the estimated fee for each project does not exceed SEK 1 million. The external auditor must advise the Audit Committee with a quarterly summary of ongoing projects related to non-audit services and year-to-date report of fees and expenses for all audit and non-audit services.

•

Specific pre-approval – all other non-audit services and services subject to general pre-approval exceeding SEK 1 million must receive specific pre-approval. The external auditor submits an application in writing to the Parent Company for final approval by the Audit Committee, including a statement as to whether, in the view of the external auditor, the contemplated services are consistent with applicable rules on their independence. The Audit Committee Chairman has the delegated authority for specific pre-approval in between Committee meetings, provided that the estimated fee in each case does not exceed SEK 2.5 million. The Chairman reports any pre-approval to the Audit Committee at its next meeting.

All services provided by the independent auditors were pre-approved in 2016.

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

All members of the Audit Committee of a NASDAQ New York-listed company must be independent in accordance with NASDAQ New York and SEC rules. SEC Rule 10A-3(b)(1)(iv)(C) under the Exchange Act includes a specific exemption from these independence requirements for Audit Committee members of foreign private issuers who are non-executive employee representatives appointed to the Audit Committee pursuant to local law. The Company relies on this exemption, and does not consider that such reliance materially adversely affects the ability of the Audit Committee to act independently or to satisfy other SEC requirements applicable to Audit Committees.

ITEM 16E.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

None.

ITEM 16F.

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

None.

ITEM 16G.

CORPORATE GOVERNANCE

Ericsson, as a company whose shares are listed on NASDAQ New York, is subject to the listing requirements and certain of the corporate governance requirements of NASDAQ New York and to certain rules of the SEC.

All members of the Audit Committee of a NASDAQ New York- listed company must be independent in accordance with NASDAQ New York and SEC rules. SEC rules include a specific exemption from these independence requirements for Audit Committee members of foreign private issuers who are non-executive employee representatives appointed to the Audit Committee pursuant to local law. The Company relies on this exemption, and does not consider that such reliance materially adversely affects the ability of the Audit Committee to act independently or to satisfy other SEC requirements applicable to Audit Committees.

Under NASDAQ New York rules, Ericsson is permitted to follow home country practices in lieu of certain NASDAQ corporate governance requirements that would apply to US companies listed on NASDAQ New York. The rules require disclosures regarding the ways in which Ericsson’s corporate governance practices differ from those required of US companies under the rules of NASDAQ New York.

These differences include the following:

•

Employee representatives are appointed to Ericsson’s Board of Directors and serve on Committees (including the Audit and the Remuneration Committees) in accordance with Swedish law.

•

Employee representatives on the Ericsson Board and Committees may attend all meetings of the Board and committees on which they serve (including those of the Audit and the Remuneration Committees) in accordance with Swedish law.

•

In accordance with Swedish market practices, the Nomination Committee is not fully comprised of Board members. In addition to the Chairman of the Board, representatives of the four largest shareholders are appointed as members of the Nomination Committee of Ericsson.

•

The determination regarding independence of Board members is made by the Nomination Committee prior to the Annual General Meeting (“AGM”) instead of the Board. Before the AGM 2016, the Nomination Committee determined that the following Board members were independent under all applicable independence requirements, including the NASDAQ New York rules: Nora Denzel, Leif Johansson, Ulf J. Johansson, Kristin Skogen Lund, Kristin S. Rinne, and Sukhinder Singh Cassidy. When appointing members to the Committees of the Board, the Board of Directors makes determinations regarding Committee member independence.

•

The Board of Directors holds non-executive Directors sessions but does not have regularly scheduled meetings with only independent directors present.

•

Under applicable Swedish rules, we are not required to publicly disclose the material terms of all agreements and arrangements between any of our directors or nominees for directors and any person or entity (other than us) relating to compensation or other payment in connection with such person’s candidacy or service as a director of our company.

•

The external auditor is elected by the shareholders and is proposed by the Nomination Committee upon recommendation from the Audit Committee.

•

NASDAQ New York rules applicable to US companies require the consideration of six factors relating to the independence of compensation consultants, legal counsel or other advisers retained by compensation or remuneration committees. Consistent with Swedish practices, the Remuneration Committee’s procedures addressing independence of advisers do not expressly require the consideration of those six factors.

•

Ericsson does not solicit proxies for shareholder meetings, which is in accordance with Swedish practices and rules.

•

There are no minimum quorum requirements for shareholder meetings under Swedish law, except under certain limited circumstances. Certain resolutions requiring special quorums and majorities are described under Memorandum and Articles of Association.

•

Some of the requirements addressed by NASDAQ New York rules are included in the Swedish Corporate Governance Code or the work procedure for the Board of Directors instead of Committee charters. The work procedure establishes the attribution of various responsibilities among the Board, its Commit tees and the President and CEO. The work procedure for the Board is reviewed, evaluated and amended as required or appropriate, and adopted by the Board at least once a year.

See “Item 8.B. Financial Information – Significant Changes” herein.

ITEM 16H.

MINE SAFETY DISCLOSURE

Not applicable.

PART III

ITEM 17.

FINANCIAL STATEMENTS

See our consolidated financial statements and accompanying notes of the 2016 Swedish Annual Report.

•

Consolidated income statement and Consolidated statement of comprehensive income

•

Consolidated balance sheet

•

Consolidated statement of cash flows

•

Consolidated statement of changes in equity

•

Notes to the consolidated financial statements

•

Report of independent registered public accounting firm

ITEM 18.

FINANCIAL STATEMENTS

Not applicable.

ITEM 19.

EXHIBITS

The exhibit index attached hereto is incorporate herein by reference.

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on Form 20-F on its behalf.


TELEFONAKTIEBOLAGET LM ERICSSON

By:		/s/ R OLAND H AGMAN
Name:		Roland Hagman
Title:		Vice President, Group Controller

By:		/s/ N INA M ACPHERSON
Name:		Nina Macpherson
Title:		Senior Vice President, Chief Legal Officer

Date: April 26, 2017

EXHIBIT INDEX

The agreements and other documents filed as exhibits to this 2016 Form 20-F are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by the registrant in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.


Exhibit Number		Description

1		Articles of Association of Telefonaktiebolaget LM Ericsson (amended April 2016)

2.1		Second Amended and Restated Deposit Agreement Among Telefonaktiebolaget LM Ericsson (publ) and Deutsche Bank Trust Company Americas, as depositary, and holders of American Depositary Receipts, dated as of January 7, 2014 (incorporated herein by reference to Exhibit 2 to the Annual Report on Form 20-F for the year ended December 31, 2014 filed by the registrant on March 31, 2015 (File No. 000-12033 )

2.2		Amendment No. 1, dated as of October 24, 2016, to the Second Amended and Restated Deposit Agreement Among Telefonaktiebolaget LM Ericsson (publ) and Deutsche Bank Trust Company Americas, as depositary, and holders of American Depositary Receipts, dated as of January 7, 2014

6		See “Financials – Notes to the consolidated financial statements – Note C1 - Significant accounting policies” of the 2016 Swedish Annual Report

7		For definitions of certain ratios used in this report, see the section of the 2016 Swedish Annual Report entitled “Financial Terminology”

8		See Item 4.C. Organizational Structure

12.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

12.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

13.1*		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

13.2*		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

15.1**		Swedish Annual Report for 2016 in English (adjusted version)

15.2		Consent of PriceWaterhouseCoopers AB

This certification will not be deemed “filed” for purposes of Section 18 of the Exchange Act (15 U.S.C. §78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

Certain of the information included in Exhibit 15.1is incorporated by reference into this 2016 Form 20-F, as specified elsewhere in this report, in accordance with Rule 12b-23(a)(3) of the Securities Exchange Act of 1934, as amended. With the exception of the items so specified, the 2016 Swedish Annual Report is not deemed to be filed as part of this 2016 Form 20-F.

Exhibit 1

TRANSLATION

ARTICLES OF ASSOCIATION

TELEFONAKTIEBOLAGET LM ERICSSON

STOCKHOLM

Org. No 556016-0680

§ 1

The name of the Company is Telefonaktiebolaget LM Ericsson. The company is a public company (publ).

§ 2

The objects of the Company are to, directly or indirectly, develop, construct, produce, sell and deliver and in other forms carry on trade and other commercial business related to goods, products and other equipment as well as maintenance and other services based on telecommunication and radio technology and other technologies for transference, transmission and other communications of speech, data, images, text, other kinds of information and means of payment and to carry on other activities consistent therewith.

§ 3

The Registered Office of the Board of Directors of the Company is in Stockholm.

§ 4

The Share Capital shall amount to no less than six thousand million (6,000,000,000) kronor and no more than twentyfour thousand million (24,000,000,000) kronor.

§ 5

The number of Shares shall amount to no less than 3,000,000,000 and no more than 12,000,000,000.

§ 6

Shares may be issued in three classes, series A, series B and series C. Shares of series A may be issued to a maximum amount of 12,000,000,000, Shares of series B to a maximum amount of 12,000,000,000, and Shares of series C to a maximum amount of 40,000,000. In voting at a General Meeting each Share of series A confers one vote, each Share of series B one tenth part of one vote and each Share of series C one thousandth part of one vote. Shares of series C do not entitle to dividend.

§ 7

If the Company decides to issue new series A, B and series C shares through a cash issue or an issue against payment through set-off of claims, each owner of series A, B and C shares has a pre-emptive right to subscribe to new shares of the same type in proportion to the number of old shares that the shareholder owns (primary pre-emptive rights). Shares not subscribed through primary pre-emptive rights shall be offered for subscription to all shareholders (subsidiary pre-emptive rights). If the number of shares so offered is less than the number subscribed through subsidiary pre-emptive rights, the shares shall be distributed among the subscribers in proportion to the number of old shares they own or, to the extent that is not possible, by lot.

If the Company decides to issue through a cash issue or an issue against payment through set-off of claims new shares either of series A, B or series C only, all shareholders, regardless of whether their shares are series A, B or series C, are entitled to pre-emptive rights to subscribe to the new shares in proportion to the number of old shares they own.

If the Company decides to issue warrants or convertibles through a cash issue or an issue against payment through set-off of claims, the shareholders have pre-emptive rights to subscribe to warrants as if the issue were of the shares that may be subscribed to pursuant to the warrant and, respectively, pre-emptive rights to subscribe to convertibles as if the issue were of the shares that the convertibles may be converted to.

The above conditions shall not restrict in any way the possibility of deciding on a cash issue or an issue against payment through set-off of claims entailing exceptions to the shareholders’ pre-emptive rights.

In the case of an increase in share capital through a bonus issue, new shares of each series shall be issued in proportion to the number of shares of the same type previously on issue. In such a case, old shares of each type entitle the holder to new shares of the same type. The aforesaid shall not restrict in any way the possibility of issuing shares of a new type through a bonus issue after the requisite changes have been made in the Articles of Association.

§ 8

The Company’s shares shall be registered in a central securities depository register pursuant to the Financial Instruments Accounts Act (Sw: lagen (1998:1479) om kontoföring av finansiella instrument).

§ 9

The Board of Directors shall consist of no fewer than five and no more than twelve Directors with no more than six Deputy Directors.

§ 10

The Company shall as Auditor have no fewer than one and no more than three registered public accounting firms.

The Board of Directors is authorized to appoint one or several special auditors to audit such statements or plans prepared by the Board of Directors in accordance with the

Companies Act (2005:551) in relation to such an issue of shares, warrants or convertibles with provisions on non-cash consideration or that subscription shall be made against payment through set-off of claims or other provisions, transfer of own shares against non-cash consideration, reduction of the share capital or the statutory reserve, merger or division of limited companies.

§ 11

The financial year of the Company shall be the calendar year.

§ 12

The following matters shall be dealt with at the Annual General Meeting:

election of a Chairman at the General Meeting;

preparation and approval of a voting list;

approval of the agenda;

examination whether the Meeting has been properly convened;

election of two persons to check the minutes;

presentation of the Annual Report and the Auditors’ report and of the Consolidated Accounts and the Auditors’ report on the Group;

resolutions in respect to

adoption of the Profit and Loss Statement and the Balance Sheet and of the Consolidated Profit and Loss Statement and the Consolidated Balance Sheet,

the Directors’ and the Managing Directors’ discharge from liability,

appropriation of the Company’s profit or loss according to the adopted Balance Sheet;

determining the number of Directors, Deputy Directors and Auditors;

determining the remuneration payable to the Board of Directors and to Auditor;

10.

elections of Directors and of Deputy Directors;

11.

elections of Auditor;

12.

other matters which shall be dealt with at the Meeting.

§ 13

Notice convening a General Meeting shall be issued through announcement in Post- och Inrikes Tidningar as well as at the Company’s website. Announcement to the effect that notice convening a General Meeting has been issued shall be made in Dagens Nyheter and Svenska Dagbladet.

§ 14

In order to be admitted to a General Meeting, a Shareholder shall have given notice of his attendance to the company not later than the day mentioned in the notice convening the Meeting, at which time also the number of advisors shall be stated. This day may not be a Sunday, another public holiday, Saturday, Midsummer Eve, Christmas Eve or New Year’s Eve and may not fall earlier than five weekdays before the General Meeting.

§ 15

The Company’s Board of Directors is authorized to decide on a reduction of the share capital through redemption of all series C shares.

In conjunction with the adoption of a resolution regarding redemption, holders of series C shares shall be obliged to surrender their shares for an amount equal to the ratio value of the shares. Payment of the redemption amount shall take place immediately.

§ 16

The Company’s Board of Directors is authorized to convert all series C shares to shares of series B when the Company holds the shares. Conversion shall be notified for registration without delay and be effected upon registration.

April 2016

Exhibit 2.2

AMENDMENT NO. 1 TO DEPOSIT AGREEMENT

AMENDMENT No. 1 dated as of October 24, 2016 (the “Amendment”) to the Second Amended and Restated Deposit Agreement dated as of January 7, 2014 (the “Deposit Agreement”) among (i) Telefonaktiebolaget LM Ericsson, a public company incorporated under the laws of Sweden, and its successors (the “Company”), (ii) Deutsche Bank Trust Company Americas, an indirect wholly owned subsidiary of Deutsche Bank A.G., acting in its capacity as depositary, and any successor depositary hereunder (the “Depositary”), and (iii) all Holders from time to time of American Depositary Receipts issued thereunder.

W I T N E S S E T H :

WHEREAS, the Company and the Depositary executed the Deposit Agreement for the purposes set forth therein; and

WHEREAS, pursuant to Section 6.01 of the Deposit Agreement, the Company and the Depositary desire to amend certain terms of the Deposit Agreement and American Depositary Receipts.

NOW, THEREFORE , for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Depositary hereby agree to amend the Deposit Agreement and the American Depositary Receipts, effective as of the dates set forth in Section 4.01 hereof, as follows:

ARTICLE I

DEFINITIONS

SECTION 1.01. Definitions . Unless otherwise defined in this Amendment, all capitalized terms used, but not otherwise defined, herein shall have the meaning given to such terms in the Deposit Agreement.

ARTICLE II

AMENDMENTS TO DEPOSIT AGREEMENT AND AMERICAN DEPOSITARY RECEIPTS

SECTION 2.01. All references in the Deposit Agreement and the American Depositary Receipts to the term “Deposit Agreement” shall, as of the dates set forth in Section 4.01 hereof with respect to particular sections below, refer to the Deposit Agreement, as amended by this Amendment.

SECTION 2.02 . The second sentence of the third paragraph of each of Section 4.07 of the Deposit Agreement and Paragraph (17) of the form of American Depositary Receipt and each outstanding American Depositary Receipt, are each amended to read as follows:

If the Depositary timely receives blocking and voting instructions from a Holder that fails to specify the manner in which the Depositary is to vote the Deposited Securities represented by such Holder’s ADSs on one or more matters presented at the relevant meeting, the Depositary will deem such Holder to have instructed the Depositary to abstain on those items for which the Holder failed to specify the manner in which the Depositary is to vote.

SECTION 2.03. The two references to “U.S.$ 2.00 per 100 ADSs” contained in Paragraph (6) of the form of American Depositary Receipt and each outstanding American Depositary Receipt are each amended to read “U.S. $ 3.00 per 100 ADSs.”

SECTION 2.04. The introductory paragraph of the form of American Depositary Receipt and each outstanding American Depositary Receipt is amended by replacing “Skandinaviska Enskilda Banken AB” with “the Custodian under the Deposit Agreement”.

SECTION 2.05. The references to “Up to $2 per 100 American Depositary Shares” and “ Up to $2 per 100 American Depositary Shares per annum” contained in Exhibit B of the Deposit Agreement are amended to read “Up to $3 per 100 American Depositary Shares” and “ Up to $3 per 100 American Depositary Shares per annum”, respectively.

SECTION 2.06. The form of American Depositary Receipt and each outstanding American Depositary Receipt, and the form of Exhibit B to the Deposit Agreement, each after giving effect to the amendments contained herein and other clarifying changes, are attached hereto as Exhibit A (for the form of American Depositary Receipt) and Exhibit B (for Exhibit B to the Deposit Agreement), respectively.

ARTICLE III

REPRESENTATIONS AND WARRANTIES

SECTION 3.01. Representations and Warranties of the Company .

Representations and Warranties . The Company represents and warrants to, and agrees with, the Depositary and the Holders, that:

(a) This Amendment, when executed and delivered by the Company, and the Deposit Agreement, as amended by this Amendment, will be, and the Deposit Agreement previously entered into has been, respectively, duly and validly authorized, executed and delivered by the Company, and each constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its respective terms, subject to applicable bankruptcy, insolvency, fraudulent transfer, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles; and

(b) In order to ensure the legality, validity, enforceability or admissibility into evidence of this Amendment or the Deposit Agreement as amended hereby, and any other document furnished hereunder or thereunder in the Kingdom of Sweden, neither of such agreements need to be filed or recorded with any court or other authority in the Kingdom of Sweden.

Section 3.02 Representations and Warranties of the Depositary . The Depositary represents and warrants to the Company that this Amendment, when executed and delivered by Depositary, and the Deposit Agreement, as amended by this Amendment, will be duly and validly authorized, executed and delivered by the Depositary, and each constitutes the legal, valid and binding obligation of the Depositary, enforceable against the Depositary in accordance with its respective terms, subject to bankruptcy, insolvency, fraudulent transfer, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles.

ARTICLE IV

MISCELLANEOUS

Section 4.01 Effective Date . This Amendment is dated as of the date set forth above and shall be effective as of the date hereof, provided, however, that the amendments set forth in Sections 2.02, 2.03 and 2.05 hereof shall not become effective until the open of business (NY time) thirty days from the date the Depositary first notifies Holders of the same.

Section 4.02 Outstanding American Depositary Receipts . American Depositary Receipts issued prior to the date hereof, which do not reflect the changes to the form of American Depositary Receipt effected hereby, do not need to be called in for exchange and may remain outstanding until such time as the Holders thereof choose to surrender them for any reason under the Deposit Agreement, as amended by this Amendment. The Depositary is authorized and directed to take any and all actions deemed necessary to effect the foregoing.

Holders and holders of American Depositary Shares issued prior to the date hereof and outstanding as of the date hereof, shall, from and after the date hereof, be deemed Holders and holders of American Depositary Shares issued pursuant and be subject to all of the terms and conditions of the Deposit Agreement, as amended by this Amendment, in all respects.

Section 4.03 Indemnification . The parties hereto accept and shall be entitled to the benefits of the indemnification provisions of Section 5.08 of the Deposit Agreement in connection with any and all liability it or they may incur as a result of the terms of this Amendment and the transactions contemplated herein.

Section 4.04 Governing Law . THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY NEW YORK LAW.

Section 4.05 Counterparts . This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the Company and the Depositary have caused this Amendment to be executed by representatives hereunto duly authorized as of the date set forth above.


TELEFONAKTIEBOLAGET LM ERICSSON
(publ)

By:

Name:		Jan Frykhammar
Title:		President and CEO

By:

Name:		Carl Mellander
Title:		Senior Vice President and CFO

DEUTSCHE BANK TRUST COMPANY AMERICAS, as the Depositary

By:

Name:		Christopher Konopelko
Title:		Director

By:

Name:		Michael Fitzpatrick
Title:		Vice President

Exhibit A

AMERICAN DEPOSITARY RECEIPT

AMERICAN DEPOSITARY SHARES

representing

DEPOSITED B SHARES OF

TELEFONAKTIEBOLAGET LM ERICSSON

(A Public Company Incorporated Under The Laws Of Sweden)

No.

DEUTSCHE BANK TRUST COMPANY AMERICAS , as Depositary (herein called the Depositary), hereby certifies that is the owner of American Depositary Shares, representing deposited B shares (such B shares are hereinafter referred to as Shares), without nominal value, of TELEFONAKTIEBOLAGET LM ERICSSON, a public company incorporated under the laws of Sweden (herein called the Company). At the date hereof, each American Depositary Share represents one (1) Share (or evidence of rights to receive one Share) deposited under the Deposit Agreement at the principal Stockholm office of the Custodian under the Deposit Agreement (herein called the Custodian). The address of the Depositary’s principal executive office is 60 Wall Street, New York, New York 10005, U.S.A.

(1) The Deposit Agreement . This American Depositary Receipt is one of an issue of American Depositary Receipts (“Receipts” or “ADRs”), all issued and to be issued upon the terms and conditions set forth in the Second Amended and Restated Deposit Agreement dated as of January 7, 2014 (as so amended and as amended or supplemented from time to time, the “Deposit Agreement”), by and among the Company, the Depositary and all Holders from time to time of ADSs issued thereunder, each of whom by accepting an ADS becomes bound by all the terms and provisions thereof. The Deposit Agreement sets forth the rights of Holders of the Receipts and the rights and duties of the Depositary in respect of the Shares deposited thereunder and any and all other securities, property and cash from time to time received in respect of such Shares and held thereunder (such Shares, securities, property and cash are hereinafter referred to as Deposited Securities). Copies of the Deposit Agreement are on file at the principal offices of the Depositary and the Custodians. The statements made on the face and the reverse of this Receipt are summaries of certain provisions of the Deposit Agreement and are qualified by and subject to the detailed provisions of the’ Deposit Agreement, to which reference is hereby made. The terms “deposit”, “surrender”, “deliver”, “transfer” or “withdraw” when used with respect to Shares, shall refer, where the context requires, to an entry or entries or an electronic transfer or transfers in an account or accounts maintained by institutions authorized under applicable law to effect transfers of securities (which may but need not be Euroclear (as defined in paragraph (3) below)), and not to the physical transfer of certificates representing the Shares.

(2) Surrender of Receipts and Withdrawal of Shares . Upon surrender at the Principal Office of the Depositary of this Receipt, and upon payment of the fee of the Depositary provided in paragraph (6) of this Receipt, and subject to the terms and conditions of the Deposit Agreement, the Holder hereof is entitled to delivery, to him or upon his order, of the Deposited Securities at the time represented by the American Depositary Shares for which this Receipt is issued. Delivery of such Deposited Securities may be made by the delivery of certificates in the name of the Holder hereof or as ordered by him or by the delivery of certificates endorsed or accompanied by proper instruments of transfer. Such delivery will be made without unreasonable delay and, at the option of the Holder hereof, either at the office of any Custodian or at the Principal Office of the Depositary, provided that the forwarding of certificates for Shares or other Deposited Securities for such delivery at the Principal office of the Depositary in the Borough of Manhattan, The City of New York shall be at the risk and expense of the Holder hereof.

(3) Transfers, Split-ups and Combinations . This Receipt is transferable on the books of the Depositary by the Holder hereof in person or by duly authorized attorney, upon surrender of this Receipt properly endorsed or accompanied by proper instruments of transfer and duly stamped as may be required by law; provided, however, that the Depositary may close the transfer books, at any time or from time to time, when deemed expedient by it in connection with the performance of its duties under the Deposit Agreement. This Receipt may be split into other Receipts or may be combined with other Receipts into one Receipt, representing the same aggregate number of American Depositary Shares as the Receipt or Receipts surrendered. As a condition precedent to the execution and delivery, registration of transfer, split-up, combination or surrender of any Receipt or withdrawal of any Deposited Securities, the Depositary or the Custodian may require payment of a sum sufficient to reimburse it for any tax or other governmental charge and any stock transfer or registration fee with respect thereto and payment of any applicable fees as provided in paragraph (6) of this Receipt, may require the production of proof satisfactory to it as to the identity and genuineness of any signature and may also require compliance with such regulations, if any, as the Depositary may establish consistent with the provisions of the Deposit Agreement.

The Depositary may refuse to execute and deliver Receipts, register the transfer of any Receipt, make any distribution of, or related to, Deposited Securities until it has received such proof of citizenship, residence, exchange control approval or other information as it may deem necessary or proper. The delivery of Receipts against deposits of Shares generally may be suspended, or the delivery of Receipts against the deposit of particular Shares may be withheld, or the registration of transfer of Receipts in particular instances may be refused, or the registration of transfers or surrenders of Outstanding Receipts generally may be suspended, during any period when the transfer books of the Depositary or the Company (or the appointed agent of the Company for transfer and registration of Shares, which may but need not be Euroclear Sweden AB (“Euroclear”) or its successor as agent of the Company for the transfer and registration for Shares) are closed, or if any such action is deemed necessary or advisable by the Depositary or the Company at any time or from time to time due to compliance with any requirement of applicable law or governmental regulation relating to Receipts or to the withdrawal of any Deposited Securities. Without limitation of the foregoing, the Depositary will not knowingly accept for deposit under the Deposit Agreement any Shares which, if sold by the holder thereof in the United States or its territories, would be subject to the registration provisions of the Securities Act of 1933, unless a registration statement is in effect as to such Shares.

(4) Liability of Holder for Taxes . If any tax or other governmental charge shall become payable with respect to any Deposited Securities represented hereby, such tax or other governmental charge shall be payable by the Holder hereof to the Depositary. The Depositary may refuse to effect any registration of transfer of this Receipt or any withdrawal of Deposited Securities represented hereby until such payment is made, and may withhold any dividends or other distributions, or may sell for the account of the Holder hereof any part or all of the Deposited Securities represented hereby, and may apply such dividends or other distributions or the proceeds of any such sale in payment of such tax or other governmental charge, the Holder hereof remaining liable for any deficiency. Every Holder and Beneficial Owner agrees to, and shall, indemnify the Depositary, the Company, the Custodian and each and every of their respective officers, directors, employees, agents and Affiliates against, and hold each of them harmless from, any claims with respect to taxes, additions to tax (including applicable interest and penalties thereon) arising out of any refund of taxes or reduced rate of withholding at source or other tax benefit obtained for or by such Holder and/or Beneficial Owner.

The Depositary, the Custodian or the Company and its agents may, but shall not be obligated to, file such reports as are necessary to reduce or eliminate applicable taxes on dividends and on other distributions

in respect of Deposited Securities under applicable tax treaties or laws for the Holders and Beneficial Owners. Holders and Beneficial Owners of American Depositary Shares may be required from time to time, and in a timely manner, to file such proof of taxpayer status, residence and beneficial ownership (as applicable), to execute such certificates and to make such representations and warranties, or to provide any other information or documents, as the Depositary or the Custodian may deem necessary or proper to fulfill the Depositary’s or the Custodian’s obligations under applicable law.

(5) Warranties by Depositor . Every person depositing Shares under the Deposit Agreement shall be deemed thereby to represent and warrant that (i) such Shares and each certificate therefore are validly issued, fully paid, non-assessable and free of any pre-emption rights of the holders of outstanding Shares, (ii) the person making such deposit is duly authorized so to do, (iii) the Shares presented for deposit are free and clear of any lien, encumbrance, security interest, charge, mortgage or adverse claim, and are not, and the American Depositary Shares issuable upon such deposit will not be, Restricted Securities and (iv) the Shares presented for deposit have not been stripped of any rights or entitlements. If any such representations or warranties are false in any way, the Company and the Depositary shall be authorized, at the cost and expense of the person depositing Shares, to take any and all actions necessary to correct the consequences thereof. Such representations and warranties shall survive the deposit of Shares and issuance of Receipts.

(6) Charges of Depositary . The Depositary will charge the following fees for the services performed under the terms of the Deposit Agreement : (i) to any party to whom Receipts are delivered against deposits, and any party surrendering Receipts for delivery of Deposited Securities, a fee not in excess of $5.00 for each 100 American Depositary Shares (or portion thereof) represented by the Receipts issued or surrendered; (ii) to any holder of ADSs (including, without limitation, Holders), a fee not in excess of U.S. $ 3.00 per 100 ADSs held for the distribution of cash proceeds, including cash dividends or sale of rights and other entitlements, not made pursuant to a cancellation or withdrawal; and (iii) for the operation and maintenance costs in administering the ADSs, an annual fee not in excess of U.S. $ 3.00 per 100 ADSs. Any and all expenses of the Depositary, including, without limitation, the charges and expenses of the Custodians under or in connection with the Deposit Agreement, other than those fees expressed to be paid by the Holders in the preceding sentence, or as may be agreed from time to time between the Company and the Depositary, will be borne by the Depositary, except (i) taxes and other governmental charges, (ii) share transfer registration fees on deposits of Shares, (iii) such cable and facsimile transmission and delivery charges as are expressly provided in the Deposit Agreement to be at the expense of persons depositing Shares or Holders of Receipts, and (iv) such expenses as are incurred by the Depositary in the conversion of foreign currency into dollars.

(7) Title to Receipts . It is a condition of this Receipt, and every successive Holder of this Receipt by accepting or holding the same consents and agrees, that title to this Receipt (and to each Certificated ADSs evidenced hereby) shall be transferable upon the same terms as a certificated security under the laws of the State of New York, provided that, in the case of Certificated ADSs, the Receipt has been properly endorsed or is accompanied by properly executed instruments of transfer. Notwithstanding any notice to the contrary, the Depositary and the Company may deem and treat the Holder of an ADS (that is, the person in whose name an ADS is registered on the books of the Depositary) as the absolute owner thereof for all purposes. Neither the Depositary nor the Company shall have any obligation or be subject to any liability under the Deposit Agreement to any holder of a Receipt or any beneficial owners unless such holder is registered as the Holder of such Receipt on the books of the Depositary or in the case of a Beneficial Owner, such Beneficial Owner or Beneficial Owner’s representative is registered as the Holder on the books of the Depositary.

(8) Validity of Receipt . This Receipt shall not be entitled to any benefits under the Deposit Agreement or be valid or obligatory for any purpose, unless this Receipt shall have been executed by the Depositary by the manual signature of a duly authorized officer or, if a Registrar for the Receipts shall have been appointed, by the manual signature of a duly authorized officer of such Registrar.

(9) Pre-release . Pursuant to the Deposit Agreement, the Depositary may issue Receipts for evidence of rights to receive Shares from the Company, or any Custodian, Registrar, transfer agent, clearing agency or other entity involved in ownership records or transaction records in respect of the Shares. Such evidence of rights is required to consist of written blanket or specific guarantees of ownership of Shares furnished on behalf of the holder thereof. The Depositary is not permitted to lend Shares or Receipts; except that the Depositary may (i) issue Receipts prior to the receipt of Shares pursuant to Section 2.02 of the Deposit Agreement and (ii) deliver Shares prior to the receipt and cancellation of Receipts pursuant to Section 2.05 of the Deposit Agreement, including Receipts which were issued under (i) above but for which Shares may not have been received. The Depositary may receive Receipts in lieu of Shares under (i) above and receive Shares in lieu of Receipts under (ii) above. The Depositary is required to cause each such transaction to be (a) accompanied by a written agreement whereby the Person to whom Receipts or Shares are to be delivered, or its customer, (1) represents that it owns the Shares or Receipts to be remitted, as the case may be (or in lieu of such representation such Person or its customer may provide such evidence of ownership of Shares or Receipts, as the case may be, as the Depositary deems appropriate), (2) agrees to indicate the Depositary as owner of such Shares or Receipts in its records and to hold such Shares or Receipts in trust for the Depositary until such Shares or Receipts are delivered to the Depositary or the Custodian, (3) unconditionally guarantees to deliver to the Depositary or the Custodian, as applicable, such Shares or Receipts and (4) agrees to any additional restrictions or requirements that the Depositary deems appropriate , (b) at all times fully collateralized (marked to market daily) with cash, United States Government securities or other collateral as the Depositary deems appropriate, (c) terminable by the Depositary on not more than five (5) business days’ notice, and (d) subject to such further indemnities and credit regulations as the Depositary deems appropriate. Pursuant to the Deposit Agreement, the Depositary has agreed to limit the number of Receipts and Shares involved in such transactions at any one time to thirty percent (30%) of the face amount of Receipts outstanding (without giving effect to Receipts outstanding under (i) above), and thirty percent (30%) of the principal amount of Shares actually deposited under the Deposit Agreement, respectively. Pursuant to the Deposit Agreement, the Depositary is required to set limits with respect to the number of Receipts and Shares involved in such transactions with any one person on a case-by-case basis as it deems appropriate. Pursuant to the Deposit Agreement collateral (but not any earnings thereon) is required to be held for the benefit of the Holder only. The Depositary may retain for its own account any compensation received by it in connection with the foregoing.

(10) Power of Attorney . The Holder hereby agrees that, upon acceptance of this Receipt issued in accordance with the terms of the Deposit Agreement, the Holder appoints the Depositary its attorney-in-fact, with full power to delegate, to act on its behalf and to take any and all steps or action provided for or contemplated herein and in the Deposit Agreement with respect to the Deposited Securities, including but not limited to those set forth in Article IV of the Deposit Agreement, and to take such further steps or action as the Depositary in its sole discretion may deem necessary or appropriate to carry out the purposes hereof and of the Deposit Agreement.

(11) Disclosure of Interest . The Holder of this Receipt agrees to comply with the Company’s Articles of Association, as they may be amended from time to time, and the laws of Sweden, with respect to disclosure requirements, if any, regarding ownership of Deposited Securities and shares in and other securities and debt obligations of the Company, all as if this Receipt was to the extent practicable the Shares represented hereby.

The Depositary shall, at the Company’s request, send to any Holder specified by the Company a notice requiring such Holder to notify the Depositary as to whether any of such Holder’s American Depositary Shares represented by any of the Receipts held by or registered in the name of such Holder are

being held, directly or indirectly, for some person other than such Holder and, if so, the name, address and citizenship of such other person or persons. Each Holder will provide to the Depositary at the Depositary’s principal office the information requested in the Depositary’s notice within five (5) business days after the date of the notice and the Depositary shall forthwith furnish the Company with the information provided. Should any Holder fail to provide the information sought within such five (5) business days, the Depositary shall notify the Company accordingly and, upon receipt of written instructions from the Company to that effect, the Depositary shall (i) discontinue the registration of transfers of all Receipts registered in the name of such Holder; (ii) suspend the distribution of payments of dividends to such Holder; and (iii) not give any further notices to such Holder; until such information is provided pursuant to Section 3.04 of the Deposit Agreement.

(12) Ownership Limitations . Holders and Beneficial Owners shall comply with any limitations on ownership of Shares under the constituent documents of the Company or applicable Swedish law as if they held the number of Shares their ADSs represent. The Company shall inform the Holders, Beneficial Owners and the Depositary of any such ownership restrictions in place from time to time, which may be through public disclosure, including via the Company’s website.

(13) Compliance with U.S. Securities Laws . Pursuant to the Deposit Agreement, the Company and the Depositary are required to exercise any rights they have under the Deposit Agreement to prevent the withdrawal or delivery of Deposited Securities in a manner which would not violate the United States securities laws, including, without being limited to, General Instruction I.A(1) to Form F-6 Registration Statement, as amended from time to time, under the Securities Act of 1933.

Dated:


Countersigned						DEUTSCHE BANK TRUST COMPANY AMERICAS,
						as Depositary

By						By
Authorized Officer						Vice President

The address of the principal office of the Depositary is 60 Wall Street, New York, New York 10005, U.S.A..

[FORM OF REVERSE OF RECEIPT]

SUMMARY OF CERTAIN ADDITIONAL PROVISIONS

OF THE DEPOSIT AGREEMENT

(14) Dividends and Distributions; Rights . Whenever the Depositary shall receive any cash dividend or other cash distribution on the Deposited Securities, the Depositary will, if at the time of receipt thereof any amounts received in a foreign currency can in the judgment of the Depositary be converted on a reasonable basis into United States dollars transferable to the United States, and subject to the provisions of the Deposit Agreement, convert such dividend or distribution into United States dollars and will distribute the amount thus received to the Holders of Receipts entitled thereto, in proportion to the number of American Depositary Shares representing such Deposited Securities held by them respectively; provided, however, that the amount distributed will be reduced by any amounts required to be withheld by the Company or the Depositary on account of taxes. If in the judgment of the Depositary amounts received in foreign currency may not be converted on a reasonable basis into United States dollars transferable to the United States, or may not be so convertible for all of the Holders of Receipts entitled thereto, the Depositary may in its discretion make such conversion, if any, and distribution in United States dollars to the extent permissible to the Holders of Receipts entitled thereto and may distribute the balance of the foreign currency received and not so convertible by the Depositary to, or hold such balance for the account of, the Holders of Receipts entitled thereto. If in the opinion of the Depositary any distribution other than cash or Shares upon any Deposited Securities cannot be made proportionately among the Holders of Receipts entitled thereto, or if for any other reason the Depositary deems such distribution not to be feasible, the Depositary may adopt such method as it may deem equitable and practicable for the purpose of effecting such distribution, including the sale (at public or private sale) of the securities or property thus received, or any part thereof, and the net proceeds of any such sale will be distributed by the Depositary to the Holders of Receipts entitled thereto as in the case of a distribution received in cash. If any distribution upon any Deposited Securities consists of a dividend in, or free distribution of, Shares, the Depositary may with the Company’s approval, and shall if the Company shall so request, distribute to the Holders of outstanding Receipts entitled thereto, in proportion to the number of American Depositary Shares representing such Deposited Securities held by them respectively, additional Receipts for an aggregate number of American Depositary Shares representing the number of Shares received as such dividend or free distribution. In lieu of delivering Receipts for fractional American Depositary Shares in any such case, the Depositary may sell the number of Shares represented by the aggregate of such fractions and distribute the net proceeds, converted into United States dollars if not in such dollars (if such conversion may in the judgment of the Depositary be achieved on a reasonable basis), to the Holders of Receipts entitled thereto. If additional Receipts are not so distributed (except as pursuant to the preceding sentence), each American Depositary Share shall thenceforth also represent the additional Shares distributed upon the Deposited securities represented thereby. In the event that the Company shall offer or cause to be offered to the holders of any Deposited Securities any rights to subscribe for additional Shares or any rights of any nature, the Depositary shall have discretion as to whether such rights are to be made available to the Holders of Receipts; provided, however, that the Depositary will, if requested by the Company, either (a) make such rights available to Holders of Receipts by means of warrants or otherwise, if lawful and feasible, or (b) if making such rights available is not lawful or not feasible, or if the rights represented by such warrants or other instruments are not exercised and appear to be about to lapse, sell such warrants or other instruments at public or private sale, at such place or places and upon such terms as the Depositary may deem proper, and allocate the proceeds of such sales for account of the Holders of Receipts otherwise entitled thereto upon an averaged or other practicable basis without regard to any distinctions among such Holders because of exchange restrictions, or the date of delivery of any Receipt or Receipts, or otherwise.

If the Depositary is unable to make any rights available to Holders upon the terms described in clause (a) of this paragraph (14) or to arrange for the sale of the rights upon the terms described in clause (b)

of this paragraph (14), the Depositary shall allow such rights to lapse. The Depositary shall not be responsible for (i) any failure to determine that it may be lawful or practicable to make such rights available to Holders in general or any Holders in particular, (ii) any foreign exchange exposure or loss incurred in connection with such sale, or exercise, or (iii) the content of any materials forwarded to the Holders on behalf of the Company in connection with the rights distribution.

Notwithstanding anything to the contrary in this Receipt or the Deposit Agreement, if registration under the Securities Act of 1933 of the securities to which any rights relate is required in order for the Company to offer such rights to Holders of Receipts and sell the securities represented by such rights, the Depositary will not offer such rights to the Holders of Receipts unless and until such a registration statement is in effect, or unless the offering and sale of such securities to the Holders of such Receipts are exempt from registration under the provisions of such Act.

There can be no assurance that Holders generally, or any Holder in particular, will be given the opportunity to exercise rights on the same terms and conditions as the holders of Shares or be able to exercise such rights. Nothing herein shall obligate the Company to file any registration statement in respect of any rights or Shares or other securities to be acquired upon the exercise of such rights.

(15) Elective Distributions in Cash or Shares . Whenever the Company intends to distribute a dividend payable at the election of the holders of Shares in cash or in additional Shares, the Company shall give notice thereof to the Depositary at least 30 days prior to the proposed distribution stating whether or not it wishes such elective distribution to be made available to Holders. Upon receipt of notice indicating that the Company wishes such elective distribution to be made available to Holders, the Depositary shall consult with the Company to determine, and the Company shall assist the Depositary in its determination, whether it is lawful and reasonably practicable to make such elective distribution available to the Holders. The Depositary shall make such elective distribution available to Holders only if (i) the Company shall have timely requested that the elective distribution is available to Holders of ADRs, (ii) the Depositary shall have determined that such distribution is reasonably practicable and (iii) the Depositary shall have received satisfactory documentation within the terms of the Deposit Agreement including, without limitation, any legal opinions of counsel in any applicable jurisdiction that the Depositary in its reasonable discretion may request, at the expense of the Company. If the above conditions are not satisfied, the Depositary shall, to the extent permitted by law, distribute to the Holders, on the basis of the same determination as is made in the local market in respect of the Shares for which no election is made, either cash or additional ADSs representing such additional Shares upon the terms described in the Deposit Agreement. If the above conditions are satisfied, the Depositary shall establish an ADS Record Date and establish procedures to enable Holders to elect the receipt of the proposed dividend in cash or in additional ADSs. The Company shall assist the Depositary in establishing such procedures to the extent necessary. Subject to paragraph (6) of this Receipt and Exhibit B to the Deposit Agreement, if a Holder elects to receive the proposed dividend (x) in cash, the dividend shall be distributed upon the terms described in Section 4.01 of the Deposit Agreement, or (y) in ADSs, the dividend shall be distributed upon the terms described in Section 4.03 of the Deposit Agreement. Nothing herein shall obligate the Depositary to make available to Holders a method to receive the elective dividend in Shares (rather than ADSs). There can be no assurance that Holders generally, or any Holder in particular, will be given the opportunity to receive elective distributions on the same terms and conditions as the holders of Shares.

(16) Record Dates . Whenever any cash dividend or other cash distribution shall become payable or any distribution other than cash shall be made, or whenever rights shall be issued, with respect to the Deposited Securities, or whenever the Depositary shall receive notice of any meeting of holders of Shares or other Deposited Securities, the Depositary will fix a record date for the determination of the Holders of Receipts who shall be entitled to receive such dividend, distribution or rights, or the net proceeds of the sale thereof, or to give instructions for the exercise of voting rights at any such meeting, subject to the provisions of the Deposit Agreement.

(17) Voting of Deposited Securities . Upon receipt of notice from the Company of any meeting, or solicitation of consent or proxy, of holders of Shares or other Deposited Securities, the Depositary shall, as soon as practicable thereafter, establish a record date applicable to Holders of American Depositary Shares entitled to instruct the Depositary to vote the Shares or other Deposited Securities represented by such Holder’s ADSs and distribute to the Holders of American Depositary Shares a notice which shall contain (a) such information as is contained in such notice of meeting, solicitation of consent or proxy, and (b) a statement that the Holders of American Depositary Shares at the close of business in New York on the specified record date will be entitled, subject to any applicable provisions of Swedish law, the Articles of Association of the Company and the Deposit Agreement, to instruct the Depositary as to the exercise of the voting rights, if any, pertaining to the amount of Shares or other Deposited Securities represented by their respective American Depositary Shares. Upon the instruction of a Holder of American Depositary Shares as of such record date, received on or before the date established by the Depositary for such purpose, to block the Holder’s American Depositary Shares in the name of the Holder (for the period specified for such purpose by the Depositary in the applicable notice to Holders) and to vote the Shares or other Deposited Securities represented thereby, the Depositary shall endeavor in so far as practicable and as permitted under Swedish law, the Company’s Articles of Association, and the terms of the Deposit Agreement, to vote or cause to be voted the amount of Shares or other Deposited Securities represented by such Holder’s American Depositary Shares in accordance with the instructions from the applicable Holder. The Depositary agrees not to exercise any voting rights or powers under any Shares or other Deposited Securities represented by the American Depositary Shares unless it has received such blocking and voting instructions from the Holder of the American Depositary Shares, and then only in accordance with such instructions.

Notwithstanding anything contained in the Deposit Agreement or any ADR, the Depositary may, to the extent not prohibited by law or regulations, or by the requirements of the stock exchange on which the ADSs are listed, in lieu of distribution of the materials provided to the Depositary in connection with any meeting of, or solicitation of consents or proxies from, holders of Deposited Securities, distribute to the Holders a notice that provides Holders with, or otherwise publicize to Holders, instructions on how to retrieve such materials or receive such materials upon request (i.e., by reference to a website containing the materials for retrieval or a contact for requesting copies of the materials).

Neither the Depositary nor the Custodian shall under any circumstances exercise any discretion as to voting and neither the Depositary nor the Custodian shall vote, attempt to exercise the right to vote, or in any way make use of for purposes of establishing a quorum or otherwise, the Deposited Securities represented by ADSs, except pursuant to and in accordance with the blocking and voting instructions timely received from Holders or as otherwise contemplated herein. If the Depositary timely receives blocking and voting instructions from a Holder that fails to specify the manner in which the Depositary is to vote the Deposited Securities represented by such Holder’s ADSs on one or more matters presented at the relevant meeting, the Depositary will deem such Holder to have instructed the Depositary to abstain on those items for which the Holder failed to specify the manner in which the Depositary is to vote. Deposited Securities represented by ADSs for which no timely blocking and voting instructions are received by the Depositary from the Holder shall not be voted.

Notwithstanding anything else contained in the Deposit Agreement or any ADR, the Depositary shall not have any obligation to take any action with respect to any meeting, or solicitation of consents or proxies, of holders of Deposited Securities if the taking of such action would violate U.S. laws. The Company agrees to take any and all actions reasonably necessary to enable Holders and Beneficial Owners to exercise the voting rights accruing to the Deposited Securities and to deliver to the Depositary an opinion of U.S. counsel addressing any actions requested to be taken if so requested by the Depositary.

There can be no assurance that Holders generally or any Holder in particular will receive the notice described above with sufficient time to enable the Holder to return blocking and voting instructions to the Depositary in a timely manner.

(18) Changes Affecting Deposited Securities . Upon any change in nominal value or par value, split-up, consolidation or any other reclassification of Deposited Securities, or upon any recapitalization, reorganization, merger or consolidation or sale of assets affecting the Company or to which it is a party, any securities which shall be received by the Depositary in exchange for or in conversion of or in respect of Deposited Securities shall be treated as new Deposited Securities under the Deposit Agreement, and the American Depositary Shares shall thenceforth represent the new Deposited Securities so received in exchange or conversion, unless additional Receipts are delivered pursuant to the following sentence. In any such case the Depositary may with the Company’s approval, and shall if the Company shall so request, execute and deliver additional Receipts as in the case of a stock dividend, or call for the surrender of outstanding Receipts to be exchanged for new Receipts. Notwithstanding the foregoing, in the event that any security so received may not be lawfully distributed to some or all Holders, the Depositary may, with the Company’s approval, and shall, if the Company requests, subject to receipt of an opinion of counsel to the Company, furnished at the expense of the Company, satisfactory to the Depositary that such action is not in violation of any applicable laws or regulations, sell such securities at public or private sale, at such place or places and upon such terms as it may deem proper and may allocate the net proceeds of such sales (net of (a) fees and charges of, and expenses incurred by, the Depositary and (b) taxes and/or governmental charges) for the account of the Holders otherwise entitled to such securities upon an averaged or other practicable basis without regard to any distinctions among such Holders and distribute the net proceeds so allocated to the extent practicable as in the case of a distribution received in cash.

(19) Reports; Inspection of Transfer Books . The Depositary will make available for inspection by Holders of Receipts at its Principal office any reports and communications received from the Company, including any proxy soliciting material, which are both (a) received by the Depositary as the holder of the Deposited Securities, and (b) made generally available to the holders of such Deposited Securities by the Company. The Depositary will also send to Holders of Receipts copies of such reports when furnished by the Company as provided in the Deposit Agreement. The Depositary will keep books for the registration of Receipts and their transfer which at all reasonable times will be open for inspection by the Holders of Receipts, provided that such inspection shall not be for the purpose of communicating with Holders of Receipts in the interest of a business or object other than the business of the Company or a matter related to the Deposit Agreement or the Receipts.

(20) Liability of the Company and the Depositary . Neither the Depositary nor the Company shall incur any liability to any Holder of this Receipt, if by reason of any provision of any present or future law of any country or of any governmental authority, or by reason of any provision, present or future, of the Articles of Association of the Company, or by reason of any act of God or war or other circumstance beyond its control, the Depositary or the Company shall be prevented or forbidden from doing or performing any act or thing which by the terms of the Deposit Agreement it is provided shall be done or performed. Neither the Company nor the Depositary assumes any obligation or shall be subject to any liability under the Deposit Agreement to Holders of Receipts, except that they agree to perform their obligations specifically set forth in the Deposit Agreement without gross negligence or willful misconduct. Neither the Depositary nor the Company shall be under any obligation to appear in, prosecute or defend any action, suit or other proceeding in respect of any Deposited Securities or in respect of the Receipts, which in its opinion may involve it in expense and liability, unless indemnity satisfactory to it against all expense and liability be furnished as often as may be required, and no Custodian shall be under any obligation whatsoever with respect to such proceedings, the responsibility of the Custodians being solely to the Depositary. Neither the Depositary nor the Company shall be liable for any (i) action or non-action by it in reliance upon the advice of or information from legal counsel, accountants, any person presenting Shares for

deposit, any Holder of a Receipt, or any other person believed by it in good faith to be competent to give such advice or information, (ii) the inability by a Holder or Beneficial Owner to benefit from any distribution, offering, right or other benefit which is made available to holders of Deposited Securities but is not, under the terms of the Deposit Agreement, made available to Holders of American Depositary Shares or (ii) any special, consequential, indirect or punitive damages for any breach of the terms of the Deposit Agreement or otherwise. The Depositary will not be responsible for any failure to carry out any instructions to vote any of the Deposited Securities, or for the manner in which any such vote is cast or effect of any such vote, provided that any such action or non-action is in good faith. The Depositary may own and deal in any class of securities of the Company and its affiliates and in Receipts. The Company agrees to indemnify the Depositary and each Custodian against, and hold each of them harmless from, any inability or expense which may arise out of acts performed in accordance with the provisions of the Deposit Agreement and of the Receipts, as the same may be amended, modified or supplemented from time to time, (i) by either the Depositary or any Custodian, except for any liability arising out of the negligence or bad faith of either of them, or (ii) by the Company or any of its agents.

(21) Resignation and Removal of Depositary; Substitution of Custodian . The Depositary may at any time resign as Depositary under the Deposit Agreement by written notice of its election so to do delivered to the Company, such resignation to take effect upon the appointment of a successor depositary and its acceptance of such appointment as provided in the Deposit Agreement. The Depositary may at any time be removed by the Company by written notice of such removal, effective upon the appointment of a successor depositary and its acceptance of such appointment as provided in the Deposit Agreement. The Depositary may at any time appoint a substitute or additional custodian and the term “Custodian” shall also refer to such substitute or additional custodian.

(22) Amendment of Deposit Agreement and Receipts . The Receipts and the Deposit Agreement may at any time and from time to time be amended by agreement between the Company and the Depositary. Any amendment which shall impose or increase any fees or charges (other than the fees of the Depositary for the issuance and delivery of ADSs and taxes and other governmental charges), or which shall otherwise prejudice any substantial existing right of Holders of ADSs, shall, however, not become effective as to outstanding ADSs until the expiration of one (1) month after notice of such amendment shall have been given to the Holders of outstanding ADSs. Every Holder of a Receipt at the time any amendment so becomes effective shall be deemed, by continuing to hold such Receipt, to consent and agree to such amendment and to be bound by the Deposit Agreement as amended thereby. In no event shall any amendment impair the right of the Holder hereof to surrender this Receipt and receive therefor the Deposited Securities represented hereby. Any amendments which (i) are reasonably necessary (as agreed by the Company and the Depositary) in order for (a) the American Depositary Shares to be registered on Form F-6 under the Securities Act or (b) the American Depositary Shares or the Shares to be traded solely in electronic book-entry form and (ii) do not in either such case impose or increase any fees or charges to be borne by Holders, shall be deemed not to materially prejudice any substantial rights of Holders or Beneficial Owners. Notwithstanding the foregoing, if any governmental body should adopt new laws, rules or regulations which would require amendment or supplement of the Deposit Agreement to ensure compliance therewith, the Company and the Depositary may amend or supplement the Deposit Agreement and the Receipts at any time in accordance with such changed laws, rules or regulations. Such amendment or supplement to the Deposit Agreement in such circumstances may become effective before a notice of such amendment or supplement is given to Holders or within any other period of time as required for compliance with such laws, rules or regulations.

(23) Termination of Deposit Agreement . The Depositary will at any time at the direction of the Company terminate the Deposit Agreement by mailing notice of such termination to the Holders of all Receipts then outstanding at least 30 days prior to the date fixed in such notice for such termination, The Depositary may likewise terminate the Deposit Agreement at any time 90 days after the Depositary shall

have resigned, if a successor depositary shall not have been appointed and accepted its appointment. If any Receipts shall remain outstanding after the date of termination, the Depositary thereafter will discontinue the registration of transfers of Receipts, will suspend the distribution of dividends to the holders thereof, and will not give any further notices or perform any further acts under the Deposit Agreement, except the collection of dividends and other distributions pertaining to Deposited Securities, the sale of rights and the delivery of Deposited Securities, together with any dividends or other distributions received with respect thereto and the net proceeds of the sale of any rights or other property, in exchange for Receipts surrendered to the Depositary. At any time after the expiration of six (6) months from the date of termination, the Depositary may sell the Deposited Securities then held under the Deposit Agreement and may thereafter hold the net proceeds of any such sale, together with any other cash then held by it under the Deposit Agreement, without liability for interest, for the pro rata benefit of the Holders of ADSs not theretofore surrendered. After making such sale, the Depositary shall be discharged from all obligations under the Deposit Agreement, except for its obligations under Section 5.08 thereof and except to account for the claims of Holders, as creditors of the Depositary, for such net proceeds and other cash, after deducting, or charging, as the case may be, the fees of the Depositary for the surrender of a Receipt, any expenses for the account of the Holder in accordance with the terms and conditions of this Deposit Agreement and any applicable taxes or governmental charges or assessments. Upon the termination of the Deposit Agreement, the Company shall be discharged from all obligations under the Deposit Agreement, except for the Company’s obligations under Section 5.08 thereof. The obligations under the terms of the Deposit Agreement and the Receipts of Holders and Beneficial Owners of ADSs outstanding as of the effective date of any termination shall survive such effective date of termination and shall be discharged only when the applicable ADSs are presented by their Holders to the Depositary for cancellation under the terms of the Deposit Agreement and the Holders have each satisfied any and all of their obligations thereunder (including, but not limited to, any payment and/or reimbursement obligations which relate to prior to the effective date of termination but which payment and/or reimbursement is claimed after such effective date of termination).

(24) Available Information . The Company currently is subject to the periodic reporting requirements of the Securities Exchange Act of 1934 and accordingly files certain reports with the Securities and Exchange Commission (hereinafter the Commission). Such reports and other information may be inspected and copied at public reference facilities maintained by the Commission in Washington, D.C.

EXHIBIT B

CHARGES OF THE DEPOSITARY


Service	Rate	By Whom Paid
(1) Receipt of deposits and issuance of Receipts	Up to $ 5 per 100 American Depositary Shares or fraction thereof	Party to whom Receipts are issued

(2) Delivery of deposited Shares against surrender of Receipts	Up to $ 5 per 100 American Depositary Shares or fraction thereof	Party surrendering Receipts

(3) Distribution of Cash Dividends and Cash Proceeds	Up to $ 3 per 100 American Depositary Shares	All holders of American Depositary Shares

(4) Administration of the ADSs	Up to $ 3 per 100 American Depositary Shares per annum	All holders of American Depositary Shares

Except as otherwise provided in the Deposit Agreement, any and all other expenses of the Depositary, including, without limitation, expenses or charges for printing, stationery, postage, insurance, cables, etc., are to be borne by the Depositary, or by the Company in accordance with agreements entered into from time to time with the Company.

Exhibit 12.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Börje Ekholm, certify that:

1.	I have reviewed this annual report on Form 20-F of Telefonaktiebolaget LM Ericsson (publ) (the “Company”);

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5.	The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Dated April 26, 2017

/s/ Börje Ekholm

Börje Ekholm

President and Chief Executive Officer

Exhibit 12.2

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Carl Mellander, certify that:

1.	I have reviewed this annual report on Form 20-F of Telefonaktiebolaget LM Ericsson (publ) (the “Company”);

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

(a)

(b)

(c)

(d)

5.	The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

(a)

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Dated April 26, 2017

/s/ Carl Mellander

Carl Mellander

Executive Vice President and

Chief Financial Officer

Exhibit 13.1

Certification of Chief Executive Officer

Pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Telefonaktiebolaget LM Ericsson (publ) (the “Company”) hereby certifies, to such officer’s knowledge, that:

(i)

the Annual Report on Form 20-F of the Company for the period ended December 31, 2016 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated April 26, 2017

/s/ Börje Ekholm

Börje Ekholm

President and Chief Executive Officer

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

Exhibit 13.2

Certification of Chief Financial Officer

(i)

(ii)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated April 26, 2017

/s/ Carl Mellander

Carl Mellander

Executive Vice President and

Chief Financial Officer

Exhibit 15.1

LOGO

SWEDISH ANNUAL REPORT

FOR 2016 IN ENGLISH

(ADJUSTED VERSION)

CONTENTS


The business

Ericsson in brief			1

CEO dialogue			2

This is Ericsson			4

Profit improvement			5

This is the market			7

The customers			10

Networks			11

IT & Cloud			13

Media			16

Global presence 24/7			18

Customer Group Industry and Society			19

Customer Group IPR & Licensing			20

The People			21

Sustainability and corporate responsibility			23

Reporting structure 2016			25

Letter from the Chairman			27

Financials

Board of Directors’ report			28

Report of independent registered public accounting firm			43

Consolidated financial statements			44

Notes to the consolidated financial statements			51

Management’s report on internal control over financial reporting			92

Risk factors			93

Forward-looking statements			102

Corporate Governance

Corporate Governance report, 2016			103

Remuneration report			131

Shareholders

Ericsson and the Capital market			135

Share information			138

Other information

Five-year summary			142

Alternative Performance Measures (APM)			143

Financial terminology and Exchange rates			148

Glossary			149

Shareholder information			150

Ericsson Annual Report on Form 20-F 2016

THE BUSINESS – Ericsson in Brief

ERICSSON IN BRIEF

Ericsson’s vision is a Networked Society where every person and every industry is empowered to reach their full potential. The potential of the Networked Society lies in transformation through mobility. Transformation in the way people organize their individual lives and carry out vital tasks. Transformation in the way we work, the way we share information, and the way we do business. Transformation in the way we consume and the way we create. To realize the vision of a Networked Society, Ericsson provides industry-leading high performing solutions for Networks, IT & Cloud and Media. The aim is to develop, produce and offer products and services with excellent and sustainable performance, at the right cost. In the fast developing ICT (Information and Communications Technology) landscape, the ambition is to be a preferred transformation partner for existing and new customers.

Ericsson has its headquarters in Stockholm, and the Ericsson share trades on Nasdaq Stockholm and on NASDAQ, New York.

LOGO

Changes in Ericsson’s organization and in the Company’s reporting structure

Starting July 1, 2016, Ericsson has implemented a series of organizational and structural changes. The new organizational structure focuses on meeting changing customer requirements and on capturing market opportunities to strengthen strategy execution and drive growth and profitability.

The financial reporting during 2016 has been based on the same segment structure as 2015 with the three reporting segments Networks, Global Services and Support Solutions.

From January 1, 2017, financial reporting is done according to a new structure, with three new financial reporting segments, Networks, IT & Cloud and Media. The new segments contain both products and services and the structure aligns company reporting with strategy execution in a simpler and more transparent way.

In this Annual Report, Ericsson’s operations are described according to the new organizational structure, while all financial data except for impairment testing of intangible assets and goodwill are made according to the prior financial reporting structure Networks, Global Services and Support Solutions.

LOGO

Ericsson Annual Report on Form 20-F 2016

THE BUSINESS – CEO dialogue

SHIFTING FOCUS FROM GROWTH TO PROFITABILITY

Ericsson’s CEO Börje Ekholm and Jan Frykhammar, who served as CEO July 2016 – mid January 2017, discuss a number of issues concerning 2016 and important topics for the Company going forward.

What’s your reflection on the year 2016?

Jan | The negative trend with low mobile broad band investments accelerated through 2016, especially in markets with a weak macro-economic environment. As a result, the leadership team and I have been fully committed to the work to reduce cost and improve efficiency, in order to secure resilience and competitiveness for the company. The cost and efficiency program, which was intensified in the second half of 2016, is expected to reduce the annual run rate of operating expenses, excluding restructuring charges, to SEK 53 billion in the second half of 2017. This is to be compared with SEK 63 billion for full-year 2014.

Börje | Operators continued to be cautious with investments in equipment as their revenues overall have come under pressure. This was reflected in our results in 2016 which did not reach our expectations. The short-term reality is that growth is limited and we have to adjust to that and prioritize what to focus on. The first task is to establish profitability and adjust the size of our operations to the demand level.

What do you consider to be the most important event during 2016?

Jan | This has been a very special year for me. I took on the role as a CEO mid-year with the ambition to stay until the search for a new CEO was completed.

During 2016 our ambition was to unite the company around the shift in focus from growth to profitability. The successful execution of the intensified activities during the second half of the year is a clear sign that the mindset of the organization has changed, enabling us to continue our work to improve profitability.

Börje | After 10 years as member of the board I got the question if I wanted to assume the day-to-day leadership of Ericsson. One of the major reasons to why I accepted was that I believe that Ericsson is a great company and that there is great business potential to exploit. This company has connected billions of people and soon we will connect many machines. Another reason to accepting the job is that I do not have anything against challenges – on the contrary. They trigger me. Thus, I look forward to refining the strategy to focus investments into areas where Ericsson both can and must win. Even if I have a decade of experience working for Ericsson as a board member, I am assuming this new responsibility with humility, understanding there is much left for me to learn.

How will Ericsson restore profitability?

Jan | As reported in 2016, the cost and efficiency program is progressing towards the target. During the year, we have pushed for strong accountability and focus on performance throughout the company. The program has been expanded to adjust the organization to lower sales volumes, and the priority has been to execute on the cost-out activities and to reduce working capital.

During 2016, operating expenses were significantly reduced through headcount reductions around the world. As the sales decline impacted the gross margin negatively, we also intensified the focus on reducing cost of sales, and thereby improving the gross margin.

Börje | Only consistent profitability and strong cash flow will provide us the freedom to continue investing in our research & development and into our future growth. In the near term, this means we prioritize profitability over growth. We aim at establishing competitive cost structures across all parts of our operations and our portfolio and continue to execute on our ongoing cost and efficiency program. We are also reviewing our overall priorities to focus on the most attractive areas. This effort involves key teams in the company, to secure quality of decisions and speed in implementation once decisions are made. All these activities are done to ensure that we remain at the forefront of technological development – building on the combined strength across products, services and solutions.

How will Ericsson work to further improve customer relations?

Jan | After I assumed the CEO position at the end of June the leadership team and I spent three months visiting a majority of Ericsson’s largest customers. In fact, the whole organization has been very active in 2016 in addressing the demands of our customers with the aim to support them in expanding their businesses, monetize on their business ideas and help them keep pace with the latest industry developments. The new organization, effective from July 1, has been developed to mirror our customers’ way of working and to better meet the needs of different customer segments.

Börje | Our task is to make our customers successful, which in turn will make us successful. It may sound like a management cliché, but we need to make decisions foremost with the customer in mind, thereafter Ericsson and finally the individual business unit. We want to be a partner to our customers as it is through partnership we can add true value. It should be easy to do business with us, and we need to reduce the complexity and simplify our processes in order to be more agile in our responses to customers.

Ericsson Annual Report on Form 20-F 2016

What are Ericsson’s competitive strengths?

Jan | Our strength is in the combination of our technology and services leadership, combined with our global presence and scale. There is actually a natural competitive advantage in our unique combination of products and services, as the network depends on the services we deliver, and the other way around. Our 111,464 employees are seriously committed and have done a great job during 2016 despite the challenging environment.

Börje | Ericsson has shaped an entire industry and led global technology developments in mobility. We are only at the beginning of the mobility journey and as the networks and applications become even more important in a 5G connected world, our customers and the industry look for continuous innovation. Ericsson is built on amazing innovations and great people and our technology leadership is reflected in the 42,000 patents we have in our IPR portfolio. It is easy to quantify our technological strength. However, our competitive advantage arises when we can combine our products, with services and solutions.

Börje, could you comment on the strategic direction going forward?

Börje | As CEO of Ericsson one of my main tasks is to create a long-term strategic plan and execute on that. Emphasis will be on refining the strategy to focus investments into areas where we both can and must win. We need to ensure that Ericsson remains at the forefront of technological development – across our portfolio and markets.

Meeting changing customer requirements and capturing market opportunities is key to being successful and to achieve this we need to continue to build from our core strengths, in both products and services. The job is to ensure that Ericsson emerges as an even stronger leader, providing the industry and our customers with superior products, services and solutions.

In the near term, stability will be key to establishing a strong base for future growth. This means prioritizing profitability over growth, but also to diligently continue to work on efficiency and effectiveness across all operations.

Stockholm, February 24, 2017

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Ericsson Annual Report on Form 20-F 2016

THIS IS ERICSSON

Ericsson provides high performing solutions for Networks, IT & Cloud, and Media. The company provides infrastructure, services and software to the telecom industry and other sectors. Ericsson has approximately 110,000 employees with customers in more than 180 countries.

During 140 years, Ericsson has delivered customer value by continuously evolving its business portfolio through its core assets – technology and services, global scale and skills. This, in combination with its business expertise, has resulted in a profound technology and services leadership. Ericsson believes that the Company’s technological and financial capability to adapt and the will to change are major competitive strengths.

Ericsson’s ability to transform its core business and its ambition to enter into new and adjacent markets are key to generating customer and shareholder value.

In 2016, approximately 67% of Ericsson’s business was related to services and software sales, compared with less than 50% ten years ago.

This change reflects the ongoing transformation from a hardware-centric business to one where the share of the software and services business continues to increase. However, competitive hardware also remains an important performance differentiator. The number of product platforms has been significantly reduced over time, while the scope has extended from mainly mobile infrastructure and related services to include IT, Cloud, support systems, media and new industry verticals. The workforce is also going through a transformation, reflecting the Company’s business and competence shift. In 2016, approximately 15,000 employees joined Ericsson and about 20,000 employees left the Company, resulting in a net reduction of 4,800 employees.

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Ericsson Annual Report on Form 20-F 2016

PROFIT IMPROVEMENT

In order to restore profitability, Ericsson is focusing on three areas: efficiency improvements, monetize Networks and build success in IT & Cloud, Media and Industry and Society. The cost and efficiency program is progressing towards the target and has been expanded to adjust the organization to lower sales volumes.

Efficiency improvements

In November 2014, Ericsson launched a global cost and efficiency program with the aim to generate savings of SEK 9 billion during 2017, with half of the savings in operating expenses and the other half within cost of sales. On July 19, 2016, the Company announced additional activities, targeting a new lower annual run rate of operating expenses, excluding restructuring charges, of SEK 53 billion in the second half of 2017. This can be compared with SEK 63 billion for full-year 2014 and equates to double the previously targeted savings in operating expenses. All efficiency measures are progressing according to plan. Operating expenses were SEK 60.5 (64.1) billion in 2016 and operating expenses excluding restructuring charges amounted to SEK 56.4 (61.4) billion. Total restructuring charges in 2016 were SEK 7.6 (5.0) billion.

During 2016, the negative industry trends intensified and thus impacted demand for mobile broadband, especially in markets with a weak macro-economic environment. Ericsson’s sales in Europe also declined, as a result of lower capacity sales and the completion of large mobile broadband projects. The sales decline has impacted the gross margin negatively, and implemented cost reductions have not been sufficient to offset the effect. To adapt operations to a lower mobile broadband market, the Company has intensified actions to reduce cost of sales further. The Company’s ambition is to make cost of sales reductions visible in an improved gross margin in the second half of 2017 compared to full year 2016.

The scope of the global cost and efficiency program involves cost of sales reductions in service delivery and supply, as well as operating expense reductions in R&D and SG&A (Selling, General and Administrative expenses) including common support functions. Major elements of the cost of sales improvement plan include activities related to service delivery such as centralization, automation and standardization, and production related activities such as increased outsourcing and production site consolidation. The target is to increase production outsourcing to above 50% in 2017 from less than 40% in 2015. Major elements in the operating expense improvement plan involve headcount reductions and outsourcing. The shift in workforce and competence is also an important long-term, value driving priority.

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Ericsson Annual Report on Form 20-F 2016

Monetize Networks

Ericsson’s strong position in both mobile infrastructure and telecom services has resulted in a large installed global base to build on, which Ericsson aims to monetize to increase sales and improve profitability. In telecom services, the Company monetizes its strong global footprint in managed services, with more than 300 ongoing contracts. In mobile infrastructure, the ambition is to increase capacity and software sales into the installed base. While market conditions are challenging in certain parts of the world, the Company continues its work to capture business opportunities as more markets shift from 3G to 4G. At the same time, the Company intends to capture growth on the strong 4G footprint with the ambition to extend its technology leadership in the emerging 5G market. The ambition is to lead in 5G transformation and thereby also strengthen profitability within the Networks business. Improving the Network Rollout business from negative to break-even or positive result is included in the monetize Network’s area.

Build success in IT & Cloud, Media and Industry and Society

Some of the attractive characteristics in the adjacent areas IT & Cloud, Media and Industry and Society are recurring revenues and a higher share of software and professional services. Over time, growth is primarily expected to be organic, complemented by selective acquisitions and a broad range of partnerships and collaborations. The overall ambitions of the partnerships, collaborations and selective M&A activities are to expand market footprint, strengthen competitive assets, fill portfolio gaps, and, above all, strengthen Ericsson’s ability to create value and to accelerate profitable growth. The strategic partnership with Cisco is an example of an important collaboration initiative.

The plan also includes expansion and capturing growth through the customer group Industry and Society in the industry verticals of utilities, transport and public safety by reusing Ericsson’s core offerings.

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Ericsson Annual Report on Form 20-F 2016

THIS IS THE MARKET

Over the next few years, telecom networks will transform into open, horizontal and programmable platforms that can connect all clouds to all devices. The increasing amount of industry use cases, including autonomous cars, massive and critical machine-to-machine communications and the vast usage of sensors will require more spectrum – as well as new spectrum. This will add a new set of requirements to existing telecom networks, creating new business opportunities for Ericsson.

A market in transformation

The market is transforming, creating new needs for Ericsson’s customers. By applying network slicing and virtualization, the network can be segmented in a smart and efficient way. This enables operators to expand their business and address new enterprise segments and industry verticals. Ericsson has taken a broad approach with the ambition to lead and drive the digitalization and transformation of the telecom industry as well as of other industries including utility, transport, and public safety.

Global market trends

The overall macro environment in 2016 has been challenging, especially in emerging markets, with a negative impact on investment willingness in certain regions and markets. In developed markets, investments in Europe have been slow, while investments in the US have remained stable. Investments in China have continued on a high level driven by 4G deployments. Only about 40 percent of the world’s population was covered by 4G/LTE at the end of 2015, which means that there is a great need for additional mobile broadband coverage before the next technology, 5G, becomes available. The demand and interest in digital transformation enabled by 5G, IoT (Internet of Things) and Cloud has accelerated, while at the same time, the industry convergence continues across IT, telecom and media.

In 2022, Ericsson estimates that there will be around 10 billion mobile subscriptions (including cellular M2M) and over 6.8 billion connected smartphones. While the earlier generations of mobile technology offered connectivity to mobile phones and smartphones, the transition to the next generation, 5G, will involve devices beyond smartphones. Ericsson estimates that there will be 29 billion connected devices in 2022, of which 18 billion will be related to Internet of Things. Video is expected to represent 75% of all mobile traffic in 2022.

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Ericsson Annual Report on Form 20-F 2016

New services and IoT communications have a wide variety of requirements on connectivity performance, coverage, security and reliability. Earlier generations of mobile technologies such as GSM and LTE operate on licensed spectrum. In 5G, licensed and unlicensed spectrum will be needed and both traditional (e.g. Wi-Fi, LTE) and new radio access technologies will be used. In the existing spectrum, 5G technology is an evolution of LTE networks and therefore backwards compatible with earlier generations of mobile communications, while the new spectrum will be addressed by new technologies. The technologies will interwork and offer strengthened capabilities to support a broad range of services.

Enriched mobile communications via smart-phones have different requirements than machine type of communications.

IoT communications also have different requirements depending on if it is critical or massive. Critical IoT might require high quality of service (QoS) or telecom grade connectivity, while the requirements of massive IoT applications such as smart sensors that connect to the cloud once in a while, are related to low cost, low energy consumption and low bandwidth.

In an environment with high data volumes, low latencies and a large number of devices, the architecture needs to be horizontalized. The benefits of a horizontal platform include the possibility to slice the network to allocate resources in the most optimal way and to connect a device to applications relevant to that device in the cloud.

Building network infrastructure in a cloud environment also requires a decoupling of network functions (software) from hardware, which is achieved through technology virtualization.

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Ericsson Annual Report on Form 20-F 2016

Ericsson is at the forefront of the 5G market, having signed 28 MoUs (Memorandum of Understanding) with operators, and with 20 different industry partners and some 45 universities and research institutes involved in the development of 5G. In addition, Ericsson is taking a leading and active role in 5G standardization globally. The Company expects 5G in large commercial deployments by 2020.

The 5G network will spur both business and technical innovation across many industries. Ericsson has several testbeds and is performing field trials of 5G radio technology, with larger pre-commercial operator trials planned for 2017.

5G forms a network where fixed and mobile services converge and will therefore also require a transformation of both the core network and the transport network. The network will consist of different access and connectivity solutions, driven by software, addressing the demands on mobile communications beyond 2020. The network will be sustainable, flexible and operationally scalable, addressing multiple industries and use cases. In fact, it will change the way the telecom industry has worked so far.

During the lifetime of traditional mobile communications, the development and adoption of new technology generations has been done through standardization processes and bodies. 5G is different as it will include devices beyond smartphones and therefore have more extensive adaption. Hence, the broad variety of use cases requires cross industry collaboration and a combination of conventional standardization and the use of Open source solutions. Thus, 5G will form a new global ecosystem with multiple use cases where Ericsson’s offering includes telecom transformation as well as digital transformation of other industries.

The increased traffic capacity and the very high data rates of 5G technology will require the development of a new flexible air interface, NX, and the introduction of new spectrum within the existing spectrum below 6 GHz, as well as new spectrum in higher frequency bands up to 100 GHz. As capacity needs have continued to grow, the use of spectrum has shifted towards higher frequencies where larger channel bandwidths are more easily found. Compared to 4G-licensed spectrum, the efficiency of 5G-licensed spectrum is significantly enhanced. Backhaul capacity also needs to evolve further to support future extreme capacity needs.

With data rates up to 100 times faster, network latency lowered by a factor of five, mobile data volumes 1,000 times greater than today’s, and battery life of remote cellular devices stretched to 10 years or more, 5G will enable new capabilities, of which greater efficiency, agile networks and seamless connectivity are a few examples. The 5G network will also, supported by its inherent sustainability characteristics, consume much less energy than earlier generations and be more cost efficient through automation and hardware optimization.

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Ericsson Annual Report on Form 20-F 2016

THE CUSTOMERS

Ericsson’s main customers are telecom operators around the world, representing approximately 90% of revenues in 2016. In addition, the Company has customers in the selected industries of utility, transport and public safety. The IPR licensing business customer base is mainly handset suppliers.

Operators

For operators to be competitive, the telecom networks need to remain a relevant part of providing high quality user experience, and they need to deliver added value in new and unique ways. Operators focus on differentiating their offerings, investing in agile and efficient networks, managing the user experience and complexity and securing good coverage and performance for all services. During 2016, there has also been an increased operator focus on 5G and IoT, digital transformation and core network transformation.

As mobile data traffic and the number of devices continue to increase, operators need to invest in infrastructure that supports throughput, performance and the large volumes of devices. While quality of service is the foundation of success, some operators differentiate by investing in high performing networks, some by swiftly adapting to market conditions and others by being first in the market with uniquely designed service offerings.

Utility, transport and public safety

The industries of utility, transport and public safety use ICT technologies in the ongoing market transformation, which is driven by mobility and new evolving technologies including smart grids, intelligent transport systems and services. Customers in these industries use ICT as an enabler to enhance the customer experience through innovation as they develop new business models and form new ecosystems.

Handset suppliers

Ericsson’s revenues from IPR (Intellectual Property Rights) has a customer base mainly consisting of handset suppliers. Smartphones are based on mobile technology, and Ericsson’s essential patents cover 2G, 3G, and 4G technologies. Over the next few years the IPR and licensing customer base is expected by Ericsson to expand to suppliers of IoT-connected devices.

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Ericsson Annual Report on Form 20-F 2016

THE BUSINESS – Business structure

NETWORKS

From 2017, the Networks segment consists of two business units, Network Products and Network Services. The overall focus is on evolving and managing access networks, including the development of hardware and software for next generation radio access and transport networks. Networks will be reported separately within the new reporting structure from 2017.

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Introduction

In Networks, Ericsson supports its operator customers by leveraging the advantages of technology and services leadership. The portfolio of radio networks and backhaul solutions are based on industry standards and can also be industrialized and adjusted to meet the demands of other industry verticals. In addition, Ericsson’s services capabilities address operator demand in an increasingly complex network environment.

The new organizational structure enables a close set-up between products and services, and allows technology and services expertise to stay close to customers, which also supports simplicity and speed in the delivery process.

Market trends and addressable market

The addressable market for Networks is estimated by Ericsson to be USD 100 billion in 2016, including both products and services.

The competitive portfolio of radio networks and backhaul solutions are based on the technology platforms that the Company develops for telecom operators. Telecom operator revenues in developed markets have been flat during recent years, and investments in many emerging markets have been impacted by a weak macro-economic environment. These circumstances have impacted the overall RAN (Radio Access Network) equipment market, which is estimated by Ericsson to have declined by 10–15% in 2016. This trend is expected to prevail and the Company is estimating that the RAN equipment market will decline by 2–6% in 2017.

Offering – main components

Networks includes several generations of radio networks as well as small cells and microwave products. Ericsson offers hardware and software both for radio access and transport. The Company also has a broad and global range of product-related services comprising design, optimization, network rollout and customer support. In addition, Ericsson provides managed services, which is a vendor agnostic service business that manages operator networks regardless of the equipment supplier. The Company operates and manages any network, or integrates any network technology, regardless of the equipment that is currently installed.

Business model

Mobile broadband

Ericsson’s most traditional business model is mobile broadband, where the Company delivers and rolls out telecom networks including all

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Ericsson Annual Report on Form 20-F 2016

necessary hardware and software. Key aspects for an operator to roll out a new technology – such as 4G/LTE – include satisfying end user demand in an efficient way, while maintaining a high-quality user experience and maximizing the revenue potential. When building network coverage across one or more geographic areas, the coverage phase, there is a large share of hardware, and the project often includes network rollout services. For Ericsson, the initial build-out or rollout phase is capital-intensive and has a lower-than-average gross margin. Currently LTE coverage is growing quickly in urban, suburban and rural areas in many countries, and Ericsson estimates that world population coverage by LTE technology will be above 80% in 2022.

When the network is up and running and demands for capacity expansions and quality improvements arise, profitability increases, driven by an increased share of software sales, network densification and less complex hardware installations, network optimization and customer support. This phase is called the capacity phase. The coverage phases are normally 1–2 years while the capacity phase lasts until the equipment is phased out, normally after 7–10 years in operation. One of the key drivers for increased capacity in the mobile networks is increased mobile data usage. Ericsson estimates that traffic generated by smart-phones alone will increase tenfold between 2016 and 2022.

Managed Services

In Managed Services, Ericsson takes over aspects of a customer’s business operation as a commitment over several years. The Managed Services business model includes three phases. The initial phase, the transition, is coupled with lower profitability, as it involves up-front costs when staff and expertise are transferred from the customer to Ericsson. In the second phase, the transformation phase, Ericsson introduces its global processes, methods and tools and implements a global delivery model. In the third phase, Ericsson focuses on optimization and industrialization by simplifying, implementing and consolidating resources, processes, methods and tools to allow for improved profitability. Managed services contracts are normally 5–7 years long. The first two phases last for 1–1.5 years while the optimization phase represents the remainder of the contract period.

The Company believes that it has reached a good balance of contracts in the transition, transformation and optimization phases.

Priorities

Ericsson is a leading and trusted network partner. Networks’ mid-term priorities are to leverage the installed base, improve profitability and increase the competiveness of its portfolio with the best total cost of ownership for its customers, as well as secure leadership in the evolution to 5G. To leverage the installed base Ericsson plans to grow its managed services and customer support business by addressing end user experience and network evolution, grow capacity sales and leverage new spectrum. In addition, the Company focuses on increasing the availability of its new radio platform Ericsson Radio System. To improve profitability and increase competitiveness, Ericsson is taking actions within Networks to improve R&D efficiency, change the supply strategy to fewer sites and a higher share of outsourced production, scale Ericsson Radio System deliveries, leverage its service delivery efficiency and promote industrialization and automation of tools and process in services delivery. In order to secure leadership in the evolution to 5G, Networks is offering capabilities for consultation and integration of solutions for 5G and IoT, is leveraging 5G software “plug-ins” (5G software features that can be applied to 4G networks) and is introducing the world’s first commercial 5G radio. In addition, the Company is driving the 5G ecosystem through collaboration with customers, universities and other industries and partnerships.

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Ericsson Annual Report on Form 20-F 2016

IT & CLOUD

The IT & Cloud business includes two business units: IT & Cloud Products and IT & Cloud Services. The focus in IT & Cloud is to help telecom operators and selected enterprises through the digital transformations ahead. This is handled mainly in three domains: Support Systems (OSS and BSS), Telecom core and IT Cloud. IT & Cloud will be reported separately within the new reporting structure from 2017.

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Introduction

The technology evolution driven by mobility, broadband, analytics, Internet of Things (IoT) and cloud is triggering a new wave of digital transformation. It is not only a technology shift but also a strong enabler for business transformation across many industries. For operators, three main business drivers for transformation can be defined:

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Digital operations – using cloud, virtualization and automation to build a more agile and efficient network and operations

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Digital engagement – as operators move from just selling connectivity to providing a full customer and application centric business, they need new tools and ways to constantly be able to engage with customers and partners

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Digital services – the ability to innovate and introduce services in days, not months, using insights derived from data analytics to identify and capture new business

Digital transformation for operators is not only a way to stay competitive, it is also a necessary shift to prepare for the growing IoT business.

IT & Cloud address these emerging demands, and with its extensive product portfolio and comprehensive service offering, IT & Cloud is equipped to handle transformations.

The desired position for Ericsson is to become a leading digital business transformation partner in and across the support systems, Telecom core and IT Cloud domains.

Market trends and addressable market

IT & Cloud’s focus is on creating opportunities for operators to unlock the full potential of mobility, mobile broadband, analytics, IoT and cloud.

Digital transformation for operators is closely related to the support systems domain and is driven by the fact that today’s customers, both consumers and enterprises, exhibit different expectations and behavior compared to what

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Ericsson Annual Report on Form 20-F 2016

many incumbent businesses are used to. This has resulted in many operators realizing that they need to embrace digital transformation to change the way they interact with their customers and to be able to provide a convenient and context-aware experience across all customer touch points. In addition, operators increasingly work with partners to participate in or drive ecosystems that accelerate innovation and increase value for consumers and industries. Lastly, to reach agility, automation and resource efficiency from software-defined infrastructure, virtualization of network functions and software-defined networking, operators are looking to transform their back-office operations and IT environments to take advantage of advanced analytics and machine learning technology.

The market for Telecom core transformation is driven by operators wanting the ability to address new enterprise segments cost efficiently, with new offerings, business models and use cases based on 5G or IoT, or both. This need is satisfied by using new Telecom core technologies like software-defined infrastructure and networking, virtualization, open systems and analytics, which allow the operator to slice its network to serve a particular industry or business segment, for example. Slicing provides dedicated yet dynamic resource utilization and quality assurance for each business, independent of others, at a much lower total cost for operators.

IT operations are under pressure to deliver speed, scalability and flexibility that meet business demands, while at the same time reducing CAPEX and OPEX. The virtualization of network functions and the related horizontal network architecture creates a market for cloud transformation and convergence of IT and networks. In addition, new cloud technology allows any enterprise to build cloud infrastructures to support their digital transformation, including architecture and economics equivalent to that of the traditional cloud service providers. The market also shows an increasing interest in making more use of public clouds for enterprise applications and in creating a hybrid cloud that shares resources from private and public clouds to run their workloads.

Offering – main components

Transformation implies journeys from the current state to a future state in many dimensions of the business. Ericsson’s IT & Cloud product and service portfolio provides customer solutions for all of the above mentioned transformation journeys. The Company believes that the ability to offer a combination of products, technology and expertise in networks, software, cloud and business processes is a significant competitive advantage. This ability is highly relevant to other industries as well as it enables expansion of the business beyond telecom operators even further.

IT & Cloud Services

With over 17,000 consultants and systems integrators building and using common best practices, service automation and asset tools, Ericsson is in a strong position to guide customers through the challenging, complex and in many cases multi-year transformation journeys. Ericsson’s services capabilities enable customer engagements ranging from consulting, setting the business direction and transformation plan, systems integration and building the new environment to establishing business processes and IT operations on behalf of the customer. The systems integrators implement the new solutions and migrate operations to the new environment, and the lifespan of the customers’ legacy applications can be extended with the Application Development and Modernization services.

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Ericsson Annual Report on Form 20-F 2016

Support Systems products

Ericsson has a market leading comprehensive, pre-integrated and modular support systems (OSS and BSS) software offering for Revenue & Customer Management, Analytics, Service Orchestration, Assurance and Network Management. Improved end-user experience with personalized offerings, consistent and effortless omnichannel experiences, simplification of network complexity, 5G and IoT are all examples of drivers for a transformed support systems environment to become a digital operator or enterprise.

Telecom core products

Ericsson provides a complete end-to-end offering for communications services including IP Multimedia Subsystem (IMS) core, application servers, subscriber databases, mobile soft switch, VoLTE and evolved packet core. These network functions are offered as physical or virtual instances to suit a wide range of operator requirements. Ericsson has a leading portfolio of virtualized network functions and an end-to-end portfolio including Service Provider SDN to support orchestration of virtualized applications in an automated way. In addition, Ericsson also provides what is known as NFV infrastructure which is a common platform for network functions that are virtualized during transformation of the core network.

IT Cloud products

A cloud system contains a range of compute, storage and networking modules that work together to build a wide range of virtual systems. Ericsson’s Cloud Infrastructure offering entails software-defined data centers and hardware platforms, software-defined networks, open platform technologies and cloud management. One of the major products is the Hyperscale Datacenter System 8000 – a new generation of datacenter system that uses a disaggregated hardware architecture for better resource utilization.

Ericsson’s cloud infrastructure solutions are based on open source and OpenStack, making the solution relevant for any industry. It can be used for different businesses in different industries, ranging from telecom cloud to hyperscale software-defined infrastructure.

Business model

The traditional business model has been to offer products and services. This has over time developed towards project business with larger and more complex undertakings. The undertakings are becoming larger, turning into full transformation projects with business benefit goals, and they include hardware and software from multiple vendors. A transformation project can turn into an IT managed services contract where Ericsson operates the transformed environment on behalf of the customer. Over time there will also be as-a-Service models in the IT & Cloud market.

Priorities

The business and operational priorities for IT & Cloud are as follows:

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Monetize the leading position – address the large installed customer base in Support Systems and Telecom core to extend the existing engagements and to grow the recurring revenues

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Re-focus the go-to-market approach – leverage the relationship with operator Chief Technology Officers to address operator Chief Information Officers. Also investigate opportunities in the enterprise markets

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Shift the portfolio – re-allocate product investments to support the growth areas, which are driven by digital transformations. This also includes the strategic partnership with Cisco to broaden the IP portfolio

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Develop service delivery – modernize tools and methods for service automation, increase use of partners and open source and establish digital transformation centers for knowledge build-up and sharing

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Shift people and competence – continue the shift towards IT, business process transformation and cloud competence

Ericsson Annual Report on Form 20-F 2016

MEDIA

Ericsson’s Media business offering includes products and services, and focuses on new market entry and expanding the Company’s footprint globally. The segment Media will be reported separately within the new reporting structure from 2017.

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Introduction

Consumer behavior is a key driver in the transformation of the media market. As an increasing share of TV and video is accessed over a smart-phone, delivering seamless TV experiences on smartphones will be a basic requirement as well. Mobile video consumption is vastly outgrowing traditional linear consumption. Ericsson offers innovative solutions that enable content owners, broadcasters, TV service providers and network operators to efficiently deliver, manage and monetize new TV experiences. Ericsson’s ambition is to be a transformation partner – which shapes the future of TV. To show its commitment to the media business the segment Media brings together media products and services competence for Content owners, Broadcasters, TV service providers and Network operators to support Ericsson’s customers in the ongoing industry transformation.

Market trends and addressable market

The fragmented TV market includes IP technology, networks and the vast amount of video-enabled connected devices that are driving the transformation of the market. Ericsson estimates that the share of video traffic will increase to 75% of total mobile traffic in 2022, compared to 50% today. The industry convergence and competitive landscape require a new set of skills and there is an increased demand for outsourcing of media operations.

While the cable operator market is moving in the direction of all IP delivery, broadcasters are seeing increased competitive pressure from the telecom operators, which are moving into broadcasting by packaging and distributing content over broadband. They are expanding their business from controlling the bit pipe to also include production and control of content. This is reflected for example in AT&T’s move towards content and its proposed takeover of Time Warner, and in Verizon’s acquisition of AOL and Yahoo.

The over-the-top players (OTT) that create global offerings at lower price points constitute another group of competitors to broadcasters. Compared to the global over-the-top players, broadcasters have a strong advantage in their localized content. They know the culture and the local consumption habits, something that Ericsson in its offering is also trying to leverage. The aim is to be global but with a localized managed services model.

Offering – main components

Ericsson develops and delivers software-based solutions for TV and media and combines a product portfolio that spans the TV value chain, with systems integration and managed services. The portfolio includes compression, software and hardware-based video processing and storage, content publishing via set-top box or pure OTT, content delivery and analytics. Services include broadcast playout, media management, captioning, content discovery and Systems Integration. The end to end offering allows Ericsson to advise, guide, support, implement and manage its customers’ transformation in the evolution of TV.

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Ericsson Annual Report on Form 20-F 2016

MediaFirst

At the core of Ericsson’s MediaFirst offering is the MediaFirst TV platform, which enables personalization, interactivity and multiscreen viewing capabilities. The platform is a software and cloud-based platform, which was developed to cater for the creation, management and delivery of next generation pay TV. Hence the MediaFirst portfolio includes the cloud TV platform, media delivery solutions and media processing.

Broadcast managed services

Every year, Ericsson Broadcast Services distributes more than 4 million hours of programming in more than 60 languages for more than 500 TV channels worldwide.

When Ericsson manages broadcast services, the Company handles the technical platforms and operational services including content logistics, library management, quality control, playout services, WebTV and mobile services. The Media service offering enables broadcasters to reduce time to market, minimize business continuity risk and achieve significant OPEX and CAPEX savings.

Package and Deliver managed services

Ericsson’s end-to-end Package and Deliver managed services offering includes the cloud media processing platform. The service platform utilizes cloud-based tools to deliver highly resilient, secure and flexible non-linear contribution, archiving and media processing. These services can deliver scalability, flexibility and elasticity to broadcasters, TV platforms and content owners.

Business model

Ericsson is moving towards a business model with a high degree of recurring software and service sales. In the new organization, Ericsson’s Media business centrally manages broadcast and cable customers. The go-to-market strategy is to move from a fragmented model to a more focused model to drive sales in selected top accounts. This will include geographical prioritization and involve both direct sales and partnering.

Priorities

Ericsson’s ambition is to be its customers’ video transformation partner. Focus is on capturing growth in media through increased software sales and expanding recurring revenues. Providing technology that brings cloud capabilities into the TV network, with the flexibility and elasticity needed to deploy software applications, continues to be a top priority. Ericsson’s ambition is to increase sales to non-operator customers and work with channel and portfolio partners, while capturing synergies from the new organization. The Company is transferring investments from legacy hardware based products to next-generation software and cloud based solutions, while focusing on a go-to-market model that drives profitable growth.

Ericsson Annual Report on Form 20-F 2016

GLOBAL PRESENCE 24/7

Ericsson is a global company, with customers in more than 180 countries. The Company has been present in many countries, such as China, Brazil and India, for more than 100 years. The go-to-market organization is based in 10 geographical regions and one region Other.

NORTH AMERICA -6%

Mobile broadband investments were stable. Professional Services sales were negatively impacted by a reduced scope in a Managed Services contract. Support Solutions sales declined due to delayed investment decisions by customers. The focus on 5G strongly increased, with trials ongoing with all major customers.

SHARE OF GROUP REVENUES: 25%

LATIN AMERICA -16%

Sales decreased following reduced mobile broadband investments due to a weak macroeconomic environment and due to devaluation of local currencies. The strong momentum for digital transformation continued. Professional Services sales declined due to lower activities in Managed Services.

SHARE OF GROUP REVENUES: 8%

WESTERN AND CENTRAL EUROPE -18%

Sales declined as the initial LTE deployments were finalized. Operators continue to focus on transforming their networks to meet the increasing demand for coverage and capacity, while at the same time improving efficiency.

SHARE OF GROUP REVENUES: 7%

MEDITERRANEAN -10%

Sales declined due to lower investments in mobile broadband infrastructure, mainly related to capacity business. Operator investments in ICT transformation and demand for Managed Services continued.

SHARE OF GROUP REVENUES: 9%

NORTHERN EUROPE AND CENTRAL ASIA -15%

Sales declined, primarily due to continued lower mobile broadband investments in Russia. Global Services sales were flat with a decline in Network Rollout, offset by increased Managed Services sales in Sweden. OSS and BSS sales were flat while TV and Media sales declined.

SHARE OF GROUP REVENUES: 4%

MIDDLE EAST -16%

Sales declined, primarily in Networks due to lower broadband investments in Egypt, Pakistan, Ethiopia and Turkey. The decrease was partly offset by growth in Global Services sales, mainly in Network Rollout and optimization services in Saudi Arabia.

SHARE OF GROUP REVENUES: 9%

NORTH EAST ASIA -3%

Sales declined slightly due to lower investments in Mainland China and Korea, partly offset by market share gains in Japan and Taiwan. In Mainland China 4G deployments continued. However, reduced investments in legacy technologies and significantly reduced investment by one customer, impacted sales negatively.

SHARE OF GROUP REVENUES: 12%

INDIA -20%

Mobile broadband sales declined mainly driven by delayed spectrum auctions which delayed operator investments. Professional Services sales remained stable with operators’ higher focus on network quality and cost optimization.

SHARE OF GROUP REVENUES: 5%

SUB-SAHARAN AFRICA -11%

Investments declined, impacted by a weak macroeconomic environment, local currency depreciation in key markets as well as low oil and commodity prices.

SHARE OF GROUP REVENUES: 4%

SOUTH EAST ASIA AND OCEANIA 15%

Sales increased, primarily driven by mobile broadband deployments across several markets. Professional Services sales developed favorably as operators focus on efficiency and network optimization services.

SHARE OF GROUP REVENUES: 10%

OTHER -23%

IPR licensing revenues amounted to SEK 10.0 (14.4) billion. Sales in 2015 were positively impacted by a global patent license agreement signed with Apple.

SHARE OF GROUP REVENUES: 7%

Legend: ± XX%

The percentage figure shows sales change 2016 compared to 2015, %

Ericsson Annual Report on Form 20-F 2016

CUSTOMER GROUP INDUSTRY AND SOCIETY

Customer Group Industry and Society addresses industries beyond telecommunications with existing Ericsson capabilities, IoT solutions and industry-adapted offerings in order to ensure scale and efficient operations across the Company. Industry and Society plays an important role in Ericsson’s strategy to expand the business beyond telecom operators by reusing and extending the current portfolio of both services and products.

Introduction

The digital transformation offers huge potential in terms of new innovations, improved efficiency, sustainability and safety in any industry. The industries benefit from Ericsson’s mobility expertise and services innovation, including, for example, solutions for smart grids in utilities and for connected vehicles in the automotive industry.

Market trends and addressable market

Ericsson’s selected industries within Industry and Society – utilities, transport and public safety – have geographically dispersed networks, regulatory frameworks and business models. This is particularly true for utilities and transport, which in many ways face conditions that are similar to those of telecom operators. Like telecom operators, they need to transform, increase their operational efficiency, improve customer experience and deliver a higher degree of innovation.

Offering – main components

For the selected industries in Industry and Society, Ericsson reuses its existing products and services offerings developed for operator customers. Ericsson has also developed a number of industry-specific cloud solutions, such as Connected Vehicle Cloud. These industry-specific solutions combine industry applications, service enablement, connectivity management and consulting as well as systems integration and managed operations services.

Business model

The new organizational structure enables Ericsson’s technology and service expertise to be close to the selected industries. Industry and Society operates with direct sales channels and work closely with partners to optimize the solutions. Ericsson supports companies not only through innovative offerings but also through its analytical capabilities, local and global presence and ability to support the customers as they develop and deploy new business models.

Priorities

Industry and Society focuses to profitably extend the business globally in the utilities, public safety and transport industries. Ericsson also evaluates the potential of entering into other industries.

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Ericsson Annual Report on Form 20-F 2016

CUSTOMER GROUP IPR & LICENSING

Ericsson has more than 42,000 granted patents. The Company is a net receiver of licensing royalties and has agreements with the largest handset suppliers in the world. Ericsson continues to expand its IPR licensing business into new technologies and industries.

Introduction

Ericsson’s technology leadership in mobile communications is demonstrated by a further strengthened IPR portfolio of more than 42,000 granted patents compared to 39,000 granted patents in 2015. Through its IPR licensing, the Company is able to encourage innovation and re-invest in further development of the communications eco-system. At the same time, IPR licensing strengthens Ericsson’s position as one of the technology leaders in the ICT industry and ensures a fair return on the Company’s R&D investment through fair, reasonable and non-discriminatory (FRAND) licensing.

IPR licensing revenues were SEK 10.0 (14.4) billion in 2016 with margins above the Company average. The Company is currently expanding its licensing business beyond handset suppliers to include other industries such as media and IoT device manufacturers. Internet of Things represents an opportunity for connected device manufacturers to expand their product offerings to new areas, and for Ericsson to expand its IPR business and become a preferred technology partner in new industries.

Market trends and addressable market

Ericsson’s licensing business promotes open standards, which enable decreased costs of technology for consumers through economies of scale and fair pricing. The open standards also lower barriers to market entry and, through interoperability and high performance, enable large markets for digital products and services. The majority of today’s IPR licensing revenues are generated from handset suppliers. The Company has agreements with the largest handset suppliers in the world. However, over the last couple of years an increasing share of the handset market is represented by the Chinese suppliers. Ericsson does not yet have agreements with some of these suppliers, which affects the IPR licensing revenue negatively in the short-term. The company is addressing new handset suppliers with the ambition to sign license agreements with them.

Ericsson is expanding the licensing business to cover products beyond handsets as connectivity is introduced in industries other than telecommunications. By 2022, the number of connected devices is expected by Ericsson to grow to 29 billion from today’s 16 billion devices.

These other industries need efficient ways to allow for all connected devices to be adequately licensed. As standard-essential patents are licensed, licensing terms are adapted for each use case to reflect the value of the patented standardized technology for the device in question and its user. The value of wireless connectivity differs greatly depending on the use case, and FRAND licensing practices are flexible enough to handle this.

The Avanci platform

In 2016, Ericsson led the formation of Avanci, a one stop shop for licensing of standard essential patents for certain IoT applications. Avanci is a third party entity through which holders of standard essential patents can license their wireless technologies to companies and manufacturers who develop and create connected devices for the IoT. For device manufacturers, the open marketplace simplifies access to wireless technologies. Avanci connects the patent holders with the companies developing the IoT devices in an uncomplicated manner and simplifies the process of identifying what essential patents are required in each device. Avanci’s initial focus will be on licenses for connected vehicles and smart meters.

Offering – main components

Ericsson’s IPR portfolio includes both patents and technology know-how. Patent licensing includes giving access to patents for different technology standards, while in technology licensing Ericsson provides specifications for proprietary technologies such as different interfaces.

Business model

For Ericsson, there is great value in the IPR portfolio in terms of securing cross-licensing agreements. These agreements are signed with other IPR patent holders in order to avoid litigation or disputes, and they give both signing companies the freedom to market products and solutions that utilize each other’s technology. As Ericsson has a strong patent portfolio, the Company believes that this approach also enables the Company to commercialize and obtain a fair return on the IPR portfolio when others use the Company’s technology.

Over the past five years, annual R&D investments have been SEK 32–36 billion, and in 2016 revenues from the IPR licensing business were SEK 10.0 (14.4) billion. As IPR licensing margins are above the Company average, they have an accretive impact on profitability.

Priorities

Ericsson’s ambition is to capture growth in the IPR licensing business by leveraging its technology leadership, ensuring license agreements with handset suppliers and expanding its business to industries other than telecommunications.

Ericsson Annual Report on Form 20-F 2016

THE PEOPLE

The People strategy is essential for Ericsson during its journey of transformation. Being a people business, Ericsson’s future success depends on the Company’s ability to attract, develop, motivate and retain talent.

By attracting and developing the best talent and establishing a high-performance organization, Ericsson can maintain a leading position in the industry. The core values of Professionalism, Respect and Perseverance are part of the Ericsson culture of creativity and innovation. The enabling culture empowers individuals and teams, which continue to transform the business and fulfill their own potential.

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Attracting the best talent

Competition for talent in the ICT industry is intense and Ericsson works continuously to attract the best talent.

The work of Ericsson employees can positively impact the lives of people around the world. Employees can also volunteer their time in many of the Company’s Technology For Good programs to bring the benefits of the Networked Society to all. In that sense, Ericsson is for people who want to make a real difference.

Ericsson strives to be a global employer of choice with consistent values. At the same time it is important to meet local needs. Ericsson wants to be recognized as a company that can fulfill both personal and career ambitions of current and potential employees.

Through an employee referral program, Ericsson involves top talent to attract other top talent from the market. The “You + Ericsson Concept” communicates people stories in social media that demonstrate Ericsson’s culture and global opportunities. Ericsson also works with universities all over the world to attract talent early. Furthermore, the Company works to promote computer science and STEM (science, technology, engineering and mathematics) education together with tech-oriented groups and community associations.

Skills as a core asset

In a rapidly evolving market, Ericsson’s employees work hard to develop and evolve the necessary skills needed to maintain a leading position in the ICT industry and to successfully support Ericsson’s customers’ transformation journey. The Company’s approach to learning is two-pronged: the first prong is a bottom-up approach with a strong focus on skills and career development at the individual level; the second

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Ericsson Annual Report on Form 20-F 2016

prong is a top-down approach that aims to close key competence gaps to enable proper execution of the Company’s business strategies and operating objectives.

Ericsson Academy prides itself on giving its employees in around 150 countries easy and equal access to innovative digital learning. Ericsson’s new Virtual Faculties, which consist of the Company’s experts in different areas such as cloud, 5G, small cell and service delivery, offer live virtual recordings in interactive sessions with employees. Through virtual sandboxes, employees get the possibility to learn about Ericsson’s portfolio to supplement their work experience.

Engagement and leadership

Ericsson’s ambition is for employees to stay motivated and engaged. To measure overall employee motivation and commitment to the company’s success, Ericsson conducts an employee survey – the Employee Engagement Index.

In 2016, due to organizational changes that took place from July 1 and a new organizational structure that was not yet complete, Ericsson conducted a poll of a representative sample of 25% of the global employee population instead of the Group wide survey normally conducted annually. Complex industry and organizational changes were reflected in overall engagement levels; the engagement index was 68% in 2016 compared to 76% in 2015. However, for Ericsson as an organization, the employees continue to report a very high sense of pride, with 82% stating that they are “proud to work for Ericsson”, compared to 88% in 2015.

Developing the right leadership capabilities and skills is essential for Ericsson’s Networked society strategy. Strong leadership is critical to taking the business forward as the Company continues to evolve.

Diversity at an inclusive workplace

Ericsson is a global company with over 170 nationalities within the organization and customers in more than 180 countries. With diversity and inclusion as one of the prime drivers of culture, Ericsson aspires to be as diverse as the world in which the Company operates. Diversity is supported by an inclusive workplace where people are valued for the different perspectives, ideas and experiences that they bring to the Company.

Attracting more women to the technology sector remains a challenge. One of Ericsson’s goals for 2020 is for 30 percent of all executives, line managers and the overall workforce at the Company to be women. To achieve this goal, the gender perspective is included in strategic processes, including talent acquisition and development programs. Ericsson also works with universities and through employer branding to attract more women. Additionally, the Global Leadership Team members all have diversity and inclusion objectives related to gender in their performance management goals.

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Ericsson Annual Report on Form 20-F 2016

SUSTAINABILITY AND CORPORATE RESPONSIBILITY

As a responsible and relevant driver of positive change in society, Ericsson is committed to creating business value while reducing risk.

Key focus areas

Ericsson’s Sustainability and Corporate Responsibility (CR) focus areas are conducting business responsibly, the environment, energy and climate action, and internet for all. Since launch in 2015, the UN Sustainable Development Goals (SDGs) to end poverty, fight inequality and injustice and halt climate change provide a framework for describing and measuring Ericsson’s impacts on society.

Conducting business responsibly

Responsible business practices are embedded in Ericsson’s operations to manage risks. The Ericsson Group Management System includes Group policies, processes and directives encompassing responsible sourcing, occupational health and safety, environmental management, anti-corruption and human rights. External assurance providers audit the system and the Ericsson Sustainability and CR report.

Governance

The Code of Business Ethics (CoBE) sets the tone for how Ericsson conducts business globally. All employees periodically acknowledge the CoBE with the next such acknowledgement planned for 2017. The Code of Conduct applies to employees and suppliers and is based on the UN Global Compact (UNGC) ten principles on human rights, labor conditions, environmental management and anti-corruption. Ericsson is committed to implementing the UN Guiding Principles on Business and Human Rights (UNGP) across its business operations and addresses and reports on its most salient human rights issues (the right to privacy, freedom of expression and labor standards) according to the UNGP Reporting Framework annually in its Sustainability and CR report.

Anti-corruption

Ericsson has a zero-tolerance approach to corruption and has invested continuously and systematically over the past decade in order to strengthen anti-corruption processes. The Company’s anti-corruption program, headed by a Chief Compliance Officer, focuses on prevention and accountability. In 2016 it was strengthened through introducing an automated anti-corruption screening tool for supplier and third-party due diligence. The tool was piloted in one region during 2016 and is planned to be further rolled out in 2017. By the end of 2016, over 95,900 employees have completed the anti-corruption e-learning launched in 2013.

Ericsson is currently voluntarily cooperating with inquiries from the United States Securities and Exchange Commission and the United States Department of Justice regarding its compliance with the U.S. Foreign Corrupt Practices Act. These inquiries concern a period from January 1, 2007 and onwards, and the Company will make additional disclosures regarding these inquiries to the extent required.

It is important to underline that Ericsson has a zero-tolerance approach to corruption and the Company continuously strengthen its compliance processes and how they are implemented. Over the last year Ericsson intensified its efforts, adding both internal resources as well as engaging outside counsel to support the overall process and give an outside view of the robustness of its programs.

Human rights

To fulfil its responsibility to respect human rights in accordance with the UNGP, Ericsson has developed and strengthened its human rights framework. The Ericsson Sales Compliance Process includes a forum that regularly reviews potential human rights impacts, with mitigation actions determined by the Sales Compliance Board where necessary.

Since 2013, Ericsson has performed UNGP-aligned Human Rights Impact Assessments in Myanmar, Iran and Ethiopia. In 2016, work was also initiated to evaluate Cuba from a human rights perspective.

Health and safety

As part of its zero major incidents vision within Occupational Health and Safety (OHS), Ericsson applies a risk-based approach to control and prevent work-related hazards. Selected operations undergo internal audits to ensure compliance with the OHSAS 18001 standard. To support a safe work environment for anyone working on

Ericsson Annual Report on Form 20-F 2016

the Company’s behalf, Ericsson takes a comprehensive and inclusive approach. The Company reports in the Sustainability and Corporate Responsibility Report on both its own incidents and fatalities and those of suppliers building and servicing networks on behalf of Ericsson.

Environment, energy and climate change

Ericsson is committed to develop and deliver solutions to support climate action. At the UN Climate Change Conference of the Parties (COP 22) in Morocco in 2016, Ericsson and other leading companies joined world leaders in supporting the goals set out in the Paris Agreement. In 2016, Ericsson’s Connected Mangroves project was one of the five winners of the United Nations Framework Convention on Climate Change “Momentum for Change” award at COP22, which honored ICT initiatives contributing to climate resilience.

Energy performance and water management

Ericsson products are designed with the aim of minimizing the components, packaging and climate impacts. In 2016, continued improvements were made in energy performance across the entire product portfolio, including Ericsson Radio System (ERS), which provides a 50% improvement in energy efficiency on previous generation. ICT also has significant transformative potential to help other sectors such as Energy and Transport to reduce their environmental impact. As a signatory to the UN Global Compact’s CEO Water Mandate, Ericsson signals its commitment to adopting and implementing a comprehensive approach to water management.

Global Product Take-Back

The Ericsson Global Product Take-back Program oversees responsible treatment of products at the end of their lifecycle. The program is offered to customers globally free of charge, not only in markets where this is required by law. In 2016, 9,600 tons of used products were taken back for controlled materials recycling. During take-back, over 98% of the materials are recycled.

Smart, sustainable cities

Deployment of broadband infrastructure is an enabler of many future services such as smart grids and intelligent transport. The Stockholm Royal Seaport project, in which Ericsson has participated for more than five years, offers a blueprint for how Swedish innovation can be applied to the sustainable city design. In 2016, Ericsson began research into enhanced consumer awareness and control of energy consumption through use of connected appliances.

Internet for all

In 2016, Ericsson launched a suite of business solutions to increase viability of mobile internet investments in developing markets. Network innovations help operators create viable and inclusive business in rural or off-grid settings by improving mobile network performance and efficiency and reducing associated network costs, and by enabling affordable 2G to 3G upgrades. These solutions build on Ericsson Radio System to cut total cost of ownership by up to 40% for operators involved in expanding mobile broadband. The Company’s Pure Solar solution launched in Myanmar for off-grid service with no diesel backup.

Technology for Good™

In the Networked Society, Ericsson is a leading advocate for Technology for Good™ using core competence and technology to address sustainable development challenges. Examples include:

•

Education – Ericsson is the lead technology partner in Connect to Learn, a global education initiative, now in 23 countries, engaging 16 mobile operators and benefitting about 80,000 students.

•

Refugees – Under a global partnership with the International Rescue Committee (IRC), Connect to Learn is working in Domiz refugee camps in Northern Iraq with operator AsiaCell to provide educational support to Internally Displaced People (IDPs) and refugees in their host communities.

•

Humanitarian Response – Ericsson Response, deployed under the ICT Humanitarian Response Working Group for Haiti, established 16 sites to support humanitarian users. There were six Ericsson Response volunteers deployed in 2016 to Haiti, with two additional volunteers supporting the deployment through the end of January 2017.

Read more about Ericsson’s approach, performance and initiatives in the Sustainability and Corporate Responsibility Report: www.ericsson.com/sustainability.

Ericsson Annual Report on Form 20-F 2016

REPORTING STRUCTURE 2016

For 2016, Ericsson reported three segments, namely Networks, Global Services and Support Solutions.

Networks

The segment delivered hardware and software that are needed for mobile and fixed communications, several generations of radio networks, IP and transmission networks, core networks and cloud. The major business models were based on network coverage build followed by network capacity expansions and upgrades with a revenue mix consisting of hardware and software. Gross margins were affected by the business mix between sales of network coverage build-outs, upgrades and network expansions. A majority of the Company’s Research and Development (R&D) investments were made within Networks in 2016. Major competitors included Huawei, Nokia and ZTE.

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Global Services

The segment delivered network rollout services and professional services such as managed services, consulting and systems integration (CSI) and customer support as well as network design and optimization services. Through Ericsson’s service delivery organization and it’s four Global Service Centers, Ericsson deployed, operated and evolved networks and related support systems. Ericsson provided managed services to networks that were typically multi-vendor, multi-technology environments. In broadcast services Ericsson expanded its service portfolio offering automation and standardization of processes, methods and tools.

The business mix in Global Services was divided between network rollout services and professional services, and approximately 2/3 of professional services sales were recurring. Major competitors included Accenture, Huawei, IBM and Nokia.

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Support Solutions

The segment developed and delivered software-based solutions for OSS and BSS as well as TV and media solutions. Sales were dominated by software, while the services part of the business was reported in Global Services. Ericsson is transforming the business model from one based on a revenue from traditional telecom software licenses to one that emphasizes recurring software licensing built on subscription-based software offerings. Due to its high software content, gross margin was typically higher than Company average, and at the same time R&D intensive. Major competitors included Amdocs, Huawei, IBM and Oracle.

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Ericsson Annual Report on Form 20-F 2016

CHANGE IN REPORTING STRUCTURE FROM 2017

Ericsson implemented a new organizational structure in 2016. The new structure builds on the Company’s technology leadership, services leadership and global scale and skills, and it supports cost reductions and efficiency improvements. It also removes duplication across portfolios and capabilities. Ericsson has adapted its organization to mirror its customers’ ways of working, with the aim to create a more efficient and purpose-built organization to meet the needs of different customer segments and more quickly seize business opportunities.

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Ericsson Annual Report on Form 20-F 2016

LETTER FROM THE CHAIRMAN

Dear shareholders,

During 2016, the market situation became increasingly challenging, mainly driven by a weak macro-economic environment. As a result, the Company increased its focus on improving profitability and on addressing the needs of customers, partly through the implementation of a series of organizational and structural changes. At the same time the Board decided that the time was right for a new leader to drive the next phase of Ericsson’s transformation.

The ambition was to find a CEO with the right background, attitude and leadership ability to take on the challenging situation, and this resulted in the appointment of Börje Ekholm as the new CEO. Börje Ekholm will lead the Company into the next phase, implement and develop the strategy, while executing on the cost and efficiency program. The Board believes that he has deep insight and understanding both of the commercial consequences and the technical aspects of the digital transformation enabled by 5G, IoT and Cloud. The Board would also at this point like to take the opportunity to thank Hans Vestberg for his energetic and inspiring leadership as CEO for almost seven years. We would also like to thank Jan Frykhammar, who shifted from CFO to interim CEO, for steering Ericsson through the second half of 2016 in a very successful way.

The Board believes that good talent management and succession planning are important tools not only on the executive level but also in technology and commercial management. By attracting and developing the best talent and establishing a high-performance organization, Ericsson can maintain a leading position in the highly competitive and ever transforming market. Also, as Ericsson speeds up strategy implementation, the Company needs to remain true to its core values of professionalism, respect and perseverance, which is reflected in a culture of endeavor and innovation.

In order to deliver value and to retain the trust of its stakeholders, Ericsson needs to continuously focus on corporate governance and to conduct business responsibly to meet demanding financial, social and environmental standards. The Board invests a significant amount of time in corporate governance and in 2016 we paid special attention to the Company’s anti-corruption program which in 2016 was strengthened through the introduction of an automated anti-corruption screening tool for supplier and third-party due diligence. Currently Ericsson is voluntarily cooperating with inquiries from the United States Securities and Exchange Commission and the United States Department of Justice regarding its compliance with the U.S. Foreign Corrupt Practices Act. These inquiries concern the last ten years and we will make additional disclosures regarding these inquiries to the extent required. It is important to underline that Ericsson has a zero-tolerance approach to corruption and has over the years continuously and systematically focused on strengthening the anti-corruption processes.

For stakeholders in the capital market, including our shareholders, Ericsson’s capital structure is an area of high interest which the Board invests significant time in analyzing and monitoring. Business plans and investments in R&D and other assets are carefully evaluated. The Board’s proposal for the AGM is a dividend of SEK 1.00 for 2016 as we believe that it is prudent to align the dividend level with 2016 earnings and the current market outlook. However, the Board expresses confidence in the ongoing actions to improve Ericsson’s financial performance, and has the ambition to increase the dividend over time as our performance improves.

Ericsson’s ambition is to be a leading transformation partner for existing and new customers. We as the Board believe the Company’s assets in combination with close customer relations and its will to transform, provide a solid foundation for long term profitable growth and value creation.

Leif Johansson

Chairman of the Board of Directors

Ericsson Annual Report on Form 20-F 2016

FINANCIALS – Board of Directors’ report

BOARD OF DIRECTORS’ REPORT

Reporting structure in 2016

Starting July 1, 2016, Ericsson has implemented an organizational change. The financial reporting during 2016 has been carried out according to the same segment structure as in 2015; Networks, Global Services and Support Solutions. The 2016 reporting structure is applied in this Board of Directors’ report.

From January 1, 2017, financial reporting is done according to the new structure, i.e., by the new segments Networks, IT & Cloud and Media.

Full-year highlights

•

Reported sales decreased by –10% mainly due to weaker demand for mobile broadband, especially in markets with a weak macroeconomic environment. IPR licensing revenues declined to SEK 10.0 (14.4) billion.

•

Operating income declined to SEK 6.3 (21.8) billion due to lower sales and a changed business mix in mobile broadband, with a lower proportion of capacity business. This was partly offset by lower operating expenses.

•

Cash flow from operating activities was SEK 14.0 (20.6) billion. Net cash at year-end was SEK 31.2 billion.

•

The Board of Directors proposes a dividend for 2016 of SEK 1.00 (3.70) per share to the AGM.

Ericsson Annual Report on Form 20-F 2016

Business in 2016

In 2016, net sales decreased by –10% mainly due to lower demand for mobile broadband, especially in markets with a weak macroeconomic environment. Sales declined in all three segments. Both operating income and margin decreased compared to last year due to lower sales and lower gross margin, partly offset by lower operating expenses.

IPR licensing revenues were SEK 10.0 (14.4) billion. IPR licensing revenues in 2015 were positively impacted by a global patent license agreement signed with Apple, which included an initial payment.

Full-year sales for the targeted growth areas; IP network, Cloud, OSS and BSS, TV and Media as well as Industry and Society, were flat and accounted for 20% of group sales.

The global cost and efficiency program, first initiated in November 2014, and expanded in 2016, progressed according to plan. The target of the program is to reduce the annual run rate of operating expenses, excluding restructuring charges, to SEK 53 billion in the second half of 2017. Operating expenses in 2016 decreased to SEK 60.5 (64.1) billion which included restructuring charges of SEK –4.1 (–2.8) billion.

Ericsson delivered a full-year cash flow from operating activities of SEK 14.0 (20.6) billion, exceeding the 70% cash conversion target.

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Ericsson Annual Report on Form 20-F 2016

Financial highlights

Net sales

Reported sales decreased by –10% mainly due to lower demand for mobile broadband, especially in markets with a weak macroeconomic environment. Sales in Europe declined following completion of mobile broadband projects in 2015. Mobile broadband sales in North America remained stable while Professional Services sales declined, mainly due to lower managed services activities. A significant managed services contract in North America was renewed with reduced scope. Sales in South East Asia increased, driven by large deliveries in coverage projects.

IPR licensing revenues amounted to SEK 10.0 (14.4) billion. Sales in 2015 were positively impacted by a global patent license agreement signed with Apple, which included an initial payment. The baseline for current IPR licensing contract portfolio is approximately SEK 7 billion on an annual basis. Smartphone volume growth, agreements with currently unlicensed handset suppliers and IoT licensing will determine growth opportunities going forward.

Currency exchange rates had no material impact on full-year sales. Sales, adjusted for comparable units and currency, decreased by –10%.

Full-year sales for targeted growth areas were flat and accounted for 20% of group sales. The partnership with Cisco has to date generated more than 100 deals across all regions.

The sales mix by commodity was: software 22% (23%), hardware 33% (34%) and services 45% (43%).

Gross margin

Gross margin declined to 29.8% (34.8%) due to a sales mix with lower share of mobile capacity business, higher share of Global Services sales and lower IPR licensing revenues as well as lower Global Services margins. In addition, restructuring charges included in the gross margin increased to SEK –3.5 (–2.3) billion.

Restructuring charges and efficiency program

Restructuring charges amounted to SEK –7.6 (–5.0) billion. The charges were mainly related to the cost and efficiency program initially announced in November 2014, and expanded in 2016. The cost and efficiency program is progressing according to plan and the target is to reduce the annual run rate of operating expenses, excluding restructuring charges, to SEK 53 billion in the second half of 2017. Efforts continue in order to reduce cost of sales, targeting to improve gross margin in the second half of 2017 compared with full-year 2016. With current plans, total restructuring charges for 2017 are estimated to be SEK 3 billion.

Operating expenses

Total operating expenses decreased to SEK 60.5 (64.1) billion as a result of the cost and efficiency program and lower amortizations of intangible assets. Operating expenses included restructuring charges of SEK –4.1 (–2.8) billion.

Other operating income and expenses

Other operating income and expenses were SEK 0.4 (0.2) billion. Currency hedge contract effects impacted the result with SEK –0.9 (–1.1) billion. They derive from the hedge contract balance in USD. The SEK has weakened against the USD between December 31, 2015 (SEK/USD rate 8.40) and December 31, 2016 (SEK/USD rate 9.06). The negative currency hedge effects were more than offset by several minor positive items.

Ericsson Annual Report on Form 20-F 2016

Operating income

Operating income decreased to SEK 6.3 (21.8) billion due to lower sales and lower gross margin, partly offset by lower operating expenses. Operating margin was 2.8% (8.8%).

Financial net

The financial net declined to SEK –2.3 (–1.9) billion following decreased interest rates and depreciated local currencies in certain markets.

Taxes

Tax cost decreased to SEK –2.1 (–6.2) billion due to lower net income, offset by prior-year adjustments and non-deductible expenses. These factors resulted in a tax rate of 53% in 2016 compared with the more normal tax rate of 31% in 2015. Average tax rate for the years 2011–2015 was 32%.

Net income and EPS

Net income decreased to SEK 1.9 (13.7) billion., for the same reasons as for the decrease in operating income. EPS diluted was SEK 0.52 (4.13) and EPS (Non-IFRS) was SEK 2.66 (6.06).

Cash flow

Cash flow from operating activities was SEK 14.0 (20.6) billion. The decline was mainly due to lower income, larger tax payments and last year’s signed global patent license agreement with Apple, which included an initial payment. Operating net assets decreased by SEK 6.0 billion, supported by reduced trade receivables and increased provisions. In addition, trade payables increased supported by implementation of supply chain financing. Inventory increased slightly.

Cash outlays related to restructuring charges were SEK –2.4 (–2.8) billion during the year.

Cash flow from investing activities was impacted by investments in property, plant and equipment of SEK –6.1 (–8.3) billion, with continued investments in the Global ICT centers. In addition, SEK –4.5 (–3.3) billion of development expenses were capitalized. The capitalized development expenses refer to development of new product platforms like the new IPTV platform, Ericsson MediaFirst, and the new BSS platform, Ericsson Revenue Manager. The company invested SEK 0.6 (2.2) billion in acquisitions of smaller companies, such as Ericpol and Node-Prime in 2016.

Cash flow from financing activities amounted to SEK –11.7 billion, impacted by SEK –12.3 billion of dividend payouts.

Financial position

Net cash decreased to SEK 31.2 (41.2) billion due to lower income and increased dividends. The decrease was partly offset by reduced operating assets.

Pension liabilities increased by SEK 1.1 billion, due to decreased discount rates.

In 2016, Standard & Poor’s and Moody’s downgraded Ericsson’s long-term rating from BBB+/Baa1 with stable outlook to BBB/Baa3 with negative outlook.

The average maturity of long-term borrowings as of December 31, 2016, was 3.8 years, compared with 4.8 years 12 months earlier. Ericsson has an unutilized Revolving Credit Facility of USD 2.0 billion. The facility expires in 2021. In addition, the company signed a new EUR 0.5 billion term loan facility in 2016. The new facility has a tenure of two years with one extension option of one year. The facility serves for general corporate purposes and is unutilized.

Intangible assets

The amount of intellectual property rights and other intangible assets amounted to SEK 51.1 (50.4) billion, including goodwill of SEK 43.4 (41.1) billion. The goodwill impairment testing has been based on the new segments that became effective as per January 1, 2017. For the Media segment the headroom is SEK 5.6 billion when a discount of 8.0% is applied. The recoverable amount is equal to its carrying amount when the discount factor is increased to 10.0%. For more information, see Note 3 “Segment reporting” and Note 10 “Intangible assets.”

Employees

In 2016, the number of employees decreased by almost 5,000 driven by the ongoing cost and efficiency program. At year-end 2016, the total number of employees was 111,464 (116,281).

Ericsson Annual Report on Form 20-F 2016

Research and development, patents and licensing

In line with the global cost and efficiency program, the Company has decreased its R&D expenses. In 2016, R&D expenses amounted to SEK 31.6 (34.8) billion. The number of R&D resources increased mainly due to an acquisition of Ericpol, a long-time supplier to Ericsson with software development in Poland and Ukraine. Approximately 2,000 employees joined Ericsson from Ericpol. The number of patents continued to increase and amounted to approximately 42,000 by end of 2016.

Research and development, patents and licensing


	2016			2015			2014
Expenses (SEK billion)		31.6			34.8			36.3
As percent of Net sales		14.2	%		14.1	%		15.9	%
Employees within R&D as of December 31 ¹⁾		24,100			23,700			25,700
Patents ¹⁾		42,000			39,000			37,000
IPR revenues, net (SEK billion)		10.0			14.4			9.9

1)	The number of employees and patents are approximate.

Seasonality

Most recent five-year average seasonality


	First quarter			Second quarter			Third quarter			Fourth quarter
Sequential change, sales		–24	%		9	%		–2	%		24	%
Share of annual sales		22	%		24	%		24	%		30	%

Off-balance sheet arrangements

Capital expenditures

For 2016, capital expenditure was SEK 6.1 (8.3) billion, representing 2.8% of sales. Expenditures are largely related to test sites and equipment for R&D, network operation centers and manufacturing and repair operations.

Investments have been made in three new global ICT centers. The centers will support R&D and services in developing and verifying solutions more efficiently and bringing innovation faster to the market. The first center, in Linköping, Sweden, was opened in 2014. The second center, in Rosersberg, Sweden, was opened in the beginning of 2016. The third center, in Montreal, Canada, was opened in December 2016. The level of capital expenditure will continue to decline as the investments in the Global ICT centers peaked in 2015.

In addition, Ericsson has invested in several buildings in Santa Clara, California and in Manchester, U.K. The purpose with the investments in Santa Clara is to consolidate Ericsson’s Silicon Valley operations. In Manchester Ericsson is investing in a new dedicated customer technical facility for its broadcast media business. The new facility is expected to be ready in April 2017 and is part of a larger transformation and investment strategy.

Apart from these investments, Ericsson believes that the Company’s property, plant and equipment and the facilities the Company occupies are suitable for its present needs.

As of December 31, 2016, no material land, buildings, machinery or equipment were pledged as collateral for outstanding indebtedness.

Capital expenditures 2012–2016


SEK billion	2016			2015			2014			2013			2012
Capital expenditures		6.1			8.3			5.3			4.5			5.4
Of which in Sweden		2.0			2.6			2.4			1.9			1.3
Share of annual sales		2.8	%		3.4	%		2.3	%		2.0	%		2.4	%

Ericsson Annual Report on Form 20-F 2016

Business results—Segments

Networks

Background

Networks represented 48.7% of net sales in 2016 (50.1% in 2015), The segment delivers products and solutions that are needed for mobile and fixed communication, several generations of radio networks, IP and transmission networks, core networks and cloud.

Business in 2016

Sales as reported decreased by –12%. The decrease was mainly due to lower sales of mobile broadband, reduced sales of core networks and lower IPR licensing revenues. Core networks sales declined due to lower sales of legacy products, not offset by growth of the new portfolio.

Mobile broadband investments were negatively impacted by a weak macroeconomic environment in a number of markets such as Latin America, the Middle East and South Africa. In addition, sales declined in Europe following the completion of large coverage projects in 2015 and in India due to delayed spectrum auctions. The sales decline was partly offset by sales growth in South East Asia where large deliveries in mobile broadband coverage projects were made.

In North America and in North East Asia, investments in network equipment were stable. In Mainland China, large-scale LTE deployments continued for the third consecutive year.

Sales, adjusted for comparable units and currency, decreased by –13%.

Operating income and margin decreased, mainly due to a lower share of mobile broadband capacity sales and lower IPR licensing revenues. The decrease was partly offset by reduced operating expenses, mainly as an effect of the ongoing cost and efficiency program. The work to improve profitability continued with significant headcount reductions and structural changes.

Restructuring charges amounted to SEK –4.0 (–2.8) billion and the negative effect from currency hedge contracts was SEK –0.7 (–0.9) billion.

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Ericsson Annual Report on Form 20-F 2016

Global Services

Background

Global Services represented 45.7% of net sales in 2016 (43.7% in 2015). The segment delivers network rollout services and professional services (i.e., managed services, consulting and systems integration (CSI), customer support as well as network design and optimization services).

Business in 2016

Sales as reported decreased by –6%. Professional Services sales declined due to lower managed services activities in North America where a contract has been renewed with reduced scope. CDMA sales declined YoY impacting Professional Services sales negatively. Network Rollout sales declined due to lower mobile broadband demand, primarily in Europe and Latin America.

Sales, adjusted for comparable units and currency, decreased by –5%.

Global Services operating income decreased to SEK 3.3 (8.2) billion. Activities were performed to adapt the service delivery organization to lower business volumes and to increase the efficiency. Restructuring charges increased to SEK –3.0 (–1.7) billion.

Professional Services operating income declined to SEK 5.2 (9.6) billion due to increased restructuring charges of SEK –2.3 (–0.7) billion, lower sales and a negative impact from large projects in systems integration transformation, where operators are looking to transform their IT environments to increase efficiency and prepare for 5G. Ericsson has been successful and won several IT transformation contracts. However, the short-term margin impact from these contracts is challenging as a consequence of investments in competence build-up and market share.

Network Rollout operating income declined to SEK –1.9 (–1.4) billion due to lower sales in combination with increased cost and negative effects from a few contracts in emerging markets. The effort to improve Network Rollout profitability continues through efficiency improvements including implementation of global methods and tools.

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Support Solutions

Background

Support Solutions represented 5.6% of net sales in 2016 (6.1% in 2015). The portfolio of Support Solutions is designed around measurable performance improvements in an operator’s business processes, with software that is scalable, configurable and that provides end-to-end capabilities. The business segment develops and delivers software-based solutions for OSS and BSS as well as TV and media solutions.

Business in 2016

Sales as reported decreased by –17%, partly due to lower IPR licensing revenues. OSS and BSS sales declined due to lower sales of legacy products and lower software sales in digital transformation projects where sales are mainly project milestone based. In addition, sales declined in markets with a weak macroeconomic environment.

Sales in TV & Media declined due to lower sales of legacy products primarily in North America. Customer trials on the next-generation TV & Media platform are ongoing, but have not yet translated into sales.

Operating income declined to SEK –1.0 (1.5) billion mainly due to lower IPR licensing revenues and lower sales in both OSS and BSS as well as in TV & Media. Several activities in order to reduce cost and adjust the organization to lower business volumes are ongoing.

The overall transition of business models continues, from traditional telecom software licenses to recurrent license revenue deals.

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Ericsson Annual Report on Form 20-F 2016

Business results—Regions

•

North America

Mobile broadband investments were stable. Professional Services sales were negatively impacted by reduced scope in a managed services contract. Support Solutions sales declined due to delayed investment decisions by customers. The focus on 5G strongly increased, with trials ongoing with all major customers.

•

Latin America

Sales decreased following reduced mobile broadband investments due to a weak macroeconomic environment in the region and due to devaluation of local currencies. The strong momentum for digital transformation continued. Professional Services sales declined due to lower activities in managed services.

•

Northern Europe and Central Asia

•

Western and Central Europe

•

Mediterranean

Sales declined due to lower investments in mobile broadband infrastructure, mainly related to capacity business. Operator investments in ICT transformation and demand for managed services continued.

•

Middle East

Sales declined, primarily in Networks due to lower broadband investments in Egypt, Pakistan, Ethiopia and Turkey. The decrease was partly offset by growth in Global Services sales, mainly in network rollout and optimization services in Saudi Arabia.

•

Sub-Saharan Africa

Investments declined, impacted by a weak macroeconomic environment, local currency depreciation in key markets as well as low oil and commodity prices.

•

India

•

North East Asia

•

South East Asia and Oceania

•

Other

IPR licensing revenues amounted to SEK 10.0 (14.4) billion. Sales in 2015 were positively impacted by a global patent license agreement signed with Apple, which included an initial payment.

Sales per region and segment 2016 and percent change from 2015


	Networks						Global Services						Support Solutions						Total
SEK million	2016			Change			2016			Change			2016			Change			2016			Change
North America		26,978			3	%		24,692			–11	%		3,077			–26	%		54,747			–6	%
Latin America		7,830			–20	%		9,270			–14	%		833			–2	%		17,933			–16	%
Northern Europe and Central Asia		4,767			–23	%		4,059			–1	%		243			–26	%		9,069			–15	%
Western and Central Europe		5,388			–20	%		10,223			–16	%		599			–20	%		16,210			–18	%
Mediterranean		7,324			–20	%		12,823			–4	%		758			1	%		20,905			–10	%
Middle East		7,553			–36	%		10,473			8	%		1,130			–9	%		19,156			–16	%
Sub-Saharan Africa		4,059			–15	%		4,649			–5	%		469			–28	%		9,177			–11	%
India		5,536			–32	%		4,617			1	%		595			–18	%		10,748			–20	%
North East Asia		18,077			–3	%		8,564			–3	%		724			6	%		27,365			–3	%
South East Asia and Oceania		12,249			22	%		9,571			10	%		360			–33	%		22,180			15	%
Other		8,577			–30	%		2,781			–3	%		3,760			–14	%		15,118	¹⁾		–23	%

Total		108,338			–12	%		101,722			–6	%		12,548			–17	%		222,608	¹⁾		–10	%

Share of total		48.7	%					45.7	%					5.6	%					100	%

1)	Discontinued segment Modems is not shown separately in the table. SEK 0 (133) million is included as region Other in the total column.

Ericsson Annual Report on Form 20-F 2016

Corporate Governance

In accordance with the Annual Accounts Act and the Swedish Corporate Governance Code (the “Code”), a separate Corporate Governance Report, including an Internal Control section, has been prepared and attached to this Annual Report.

Continued compliance with the Swedish Corporate Governance Code

Ericsson is committed to complying with best-practice corporate governance standards on a global level wherever possible. For 2016, Ericsson does not report any deviations from the Code.

Business integrity

Ericsson’s Code of Business Ethics summarizes the Group’s basic policies and directives governing its relationships internally, with its stakeholders and with others. It also sets out how the Group works to secure that business activities are conducted with a strong sense of integrity.

Board of Directors

At the Annual General Meeting, held on April 13, 2016, Leif Johansson was re-elected Chairman of the Board and Nora Denzel, Börje Ekholm, Ulf J. Johansson, Kristin Skogen Lund, Sukhinder Singh Cassidy, Hans Vestberg and Jacob Wallenberg were re-elected members of the Board. Helena Stjernholm and Kristin S. Rinne were elected new Board members and Roxanne S. Austin, Alexander Izosimov and Anders Nyrén left the Board. Hans Vestberg left his positions within Ericsson, including his Board position, as of July 25, 2016. As of April 13, 2016, Pehr Claesson, Mikael Lännqvist and Karin Åberg were appointed employee representatives by the unions, with Zlatko Hadzic, Roger Svensson and Kjell-Åke Soting as deputies.

Management

Hans Vestberg left his position as President and CEO of the Group effective July 25, 2016 and was replaced by the Executive Vice President Jan Frykhammar. Effective January 16, 2017, Börje Ekholm was appointed new President and CEO of the Group. The President and CEO is supported by the Group management, consisting of the Executive Leadership Team (ELT).

A global management system is in place to ensure that Ericsson’s business is well controlled and has the ability to fulfill the objectives of major stakeholders within established risk limits. The management system also monitors internal control and compliance with applicable laws, listing requirements and governance codes.

Remuneration

Remuneration to the members of the Board of Directors and to Group management, as well as the Guidelines for remuneration to Group management resolved by the Annual General Meeting 2016, are reported in Notes to the consolidated financial statements – Note C28, “Information regarding members of the Board of Directors, the Group management and employees”.

The Board of Directors’ proposal for guidelines for remuneration to Group management

The Board of Directors proposes that the 2017 Annual General Meeting of shareholders resolve on the guidelines below for remuneration to Group Management for the period up to the 2018 Annual General Meeting. Compared to the guidelines resolved by the 2016 Annual General Meeting, it has been added that targets for variable compensation may also include share price-related targets.

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Ericsson Annual Report on Form 20-F 2016

Guidelines for Remuneration to Group Management

For Group Management consisting of the Executive Leadership Team, including the President and CEO, total remuneration consists of fixed salary, short- and long-term variable compensation, pension and other benefits. The following guidelines apply for the remuneration of the Executive Leadership Team:

•

Variable compensation is in cash and stock-based programs, awarded against specific business targets derived from the long-term business plan approved by the Board of Directors. Targets may include share price-related or financial targets at either Group or unit level, operational targets, employee engagement targets or customer satisfaction targets.

•

All benefits, including pension benefits, follow the competitive practice in the home country taking total compensation into account.

•

By way of exception, additional arrangements can be made when deemed necessary. An additional arrangement can be renewed but each such arrangement shall be limited in time and shall not exceed a period of 36 months and twice the remuneration that the individual would have received had no additional arrangement been made.

•

The mutual notice period may be no more than six months. Upon termination of employment by the Company, severance pay amounting to a maximum of 18 months fixed salary is paid. Notice of termination given by the employee due to significant structural changes, or other events that in a determining manner affect the content of work or the condition for the position, is equated with notice of termination served by the Company.

Executive Performance Stock Plan

The Company has operated a Long-Term Variable Compensation program (LTV), building on a common platform of investment in, and matching of, Ericsson shares. It has consisted of three separate plans: one targeting all employees, one targeting key contributors and one targeting senior managers. The program has been designed to encourage long-term value creation in alignment with shareholders’ interests. The aim of the plan for senior managers has been to attract, retain and motivate executives in a competitive market through performance-based share-related incentives and to encourage the build-up of significant equity stakes. The performance criteria for senior managers under the Executive Performance Stock Plan have been approved by the Annual General Meeting.

The targets for the 2014, 2015 and 2016 Executive Performance Stock Plans are shown in the illustration on page 46. The performance criteria are:

Up to one-third of the award will vest if the target for compound annual growth rate of consolidated net sales is achieved.

Up to one-third of the award will vest if the target for compound annual growth rate of consolidated operating income, is achieved.

Up to one-third of the award will vest if cash conversion is at or above 70% during each of the years, vesting one-ninth of the award for each year the target is achieved. The cash conversion targets were reached in 2016, 2015 and 2014.

Before the number of performance shares to be matched is finally determined, the Board of Directors shall examine whether the performance matching is reasonable considering the Company’s financial results and position, conditions on the share market and other circumstances, and if not, reduce the number of performance shares to be matched.

Since no Stock Purchase Plan will be proposed for 2017, alternative arrangements have been developed to replace the Executive Performance Stock Plan. For the Global Leadership Team, a share-based program is proposed for approval by the Annual General Meeting of shareholders (“AGM”) 2017. Details of the performance criteria are outlined in the notice of the AGM 2017.

Material contracts

Material contractual obligations are outlined in Note C31, “Contractual obligations.” These were entered into in the ordinary course of business and were primarily related to operating leases for office and production facilities, purchase contracts for outsourced manufacturing, R&D and IT operations, and the purchase of components for the Company’s own manufacturing. Ericsson is party to certain agreements, which include provisions that may take effect or be altered or invalidated by a change in control of the Company as a result of a public takeover offer. Such provisions are not unusual for certain types of agreements, such as for example financing agreements and certain license agreements. However, considering among other things the Company’s strong financial position, the Company believes that none of the agreements currently in effect would in and of itself entail any material consequence for Ericsson due to a change in control of the Company.

Risk management

Risks are defined in both a short-term and long-term perspective. They are related to long-term objectives as per the strategic direction as well as short-term objectives for next coming year. Risks are categorized into industry and market risks, commercial risks, operational risks and compliance risks. Ericsson’s risk management is

Ericsson Annual Report on Form 20-F 2016

based on the following principles, which apply universally across all business activities and risk types:

•

Risk management is an integrated part of the Ericsson Group Management System.

•

Each operational unit is accountable for owning and managing its risks according to policies, directives and process tools. Decisions are made or escalated according to defined delegation of authority. Financial risks are coordinated through Group Function Finance.

•

Risks are dealt with during the strategy process, annual planning and target setting, continuous monitoring through monthly and quarterly steering group meetings and during operational processes (customer projects, customer bid/contract, acquisition, investment and product development projects). They are subject to various controls such as decision tollgates and approvals.

At least twice a year, in connection with the approval of strategy and targets, risks are reviewed by the Board of Directors.

A central security unit coordinates management of certain risks, such as business interruption, information security and physical security. The Group Crisis Management Council deals with events of a serious nature.

For information on risks that could impact the fulfillment of targets and form the basis for mitigating activities, see the other sections of the Board of Directors’ report, Notes C2 “Critical accounting estimates and judgments,” C14 “Trade receivables and customer finance,” C19 “Interest-bearing liabilities,” C20 “Financial risk management and financial instruments” and the chapter Risk factors.

Sourcing and supply

Ericsson’s hardware largely consists of electronics. For manufacturing, the Company purchases customized and standardized components and services from several global providers as well as from local and regional suppliers.

The production of electronic modules and sub-assemblies is mostly outsourced to manufacturing services companies, of which the vast majority are in low-cost countries. Final configuration of products is largely done in-house. This consists of assembling and testing modules and integrating them into complete units. Final assembly and testing are concentrated to a few sites. Ericsson has 10 manufacturing sites in Brazil, China, Estonia, India, Mexico and Sweden.

A number of suppliers design and manufacture highly specialized and customized components. The Company generally negotiates global supply agreements with its primary suppliers. Ericsson’s suppliers are required to comply with the requirements of Ericsson’s Code of Conduct.

In general, Ericsson has alternative supply sources and seeks to avoid single source supply situations.

Variations in market prices for raw materials generally have a limited effect on total cost of goods sold. For more information, see the chapter Risk factors.

Sustainability and Corporate Responsibility

Sustainability and Corporate Responsibility (CR) are central to Ericsson’s core business and the Company’s commitment to the triple bottom line of responsible financial and environmental performance and socio-economic development. Ericsson’s ambition is to be a relevant and responsible driver of positive change. The Company aims to do this by creating positive impacts in society and minimizing risks for stakeholders.

Ericsson’s approach to Sustainability and Corporate Responsibility is integrated into business operations throughout the value chain; performance is regularly measured and assessed. The Board of Directors is briefed on Sustainability and Corporate Responsibility issues twice per year, or as needed on an ad hoc basis. Group policies and directives are implemented to ensure consistency across global operations. Ericsson’s annual Sustainability and Corporate Responsibility Report provides additional information.

Responsible business practices

Since 2000, Ericsson has supported the UN Global Compact, endorses its ten principles regarding human rights and labor standards, anti-corruption and environmental protection, and reports its Communication on Progress at the Advanced level. In 2016, for the third year, Ericsson reported according to the UN Guiding Principles on Business and Human Rights Reporting Framework. The Ericsson Group Management System includes a Code of Business Ethics, a Code of Conduct, a Sustainability Policy and an Occupational Health and Safety Policy which reflect responsible business practices. These policies and practices are reinforced by employee awareness training and monitoring, and their implementation is externally assured.

Anti-corruption

Ericsson’s anti-corruption program, focused on prevention and accountability, is continuously strengthened. In 2016, that included: adding additional resources to the Compliance Office headed by the Chief Compliance Officer; launching an automated anti-corruption screening tool for conducting due diligence of suppliers and other third parties in Region Northern Europe and Central Asia, with global rollout

Ericsson Annual Report on Form 20-F 2016

planned for 2017. Between 2013 and the end of 2016, more than 95,900 active employees completed an anti-corruption e-learning course.

Human rights

The Code of Business Ethics and Code of Conduct reflect the Company’s ongoing commitment to respect human rights. Ericsson works actively to integrate the United Nations Guiding Principles on Business and Human Rights into its governance framework. Human rights due diligence was strengthened in areas such as Sales Compliance which evaluates possible risks to human rights based on unintended use of technology according to established criteria that is implemented globally. During 2016, more than 600 cases within the Sales Compliance Process were reviewed; 7% were rejected and 93% were approved or approved with mitigating conditions.

Since 2013, Ericsson has performed UNGP-aligned Human Rights Impact Assessments in Myanmar, Iran and Ethiopia. In 2016, work was also initiated to evaluate Cuba from a human rights perspective. During 2016, a review of both the Code of Conduct and the Code of Business Ethics was initiated for example to assess the needs for updates and improvements in light of new legislation in the UK on modern slavery and human trafficking.

Responsible sourcing

Suppliers must comply with the requirements of Ericsson’s Code of Conduct. In 2016, third-party audits were introduced, which will enhance the credibility and robustness of supplier audits and assessments. The Company uses a risk-based approach to ensure that the high-risk portfolio areas, and highest-risk markets, are targeted first. For prioritized areas such as road and vehicle safety, working at heights, working hours and labor rights, Ericsson performs regular audits and works with suppliers to ensure measurable and continuous improvements. Findings are followed up to ensure that improvements are made. In 2016, over 330 audits and assessments were performed.

Ericsson addresses the issue of conflict minerals, including compliance with the US Dodd-Frank Act and the disclosure rule adopted by the U.S. Securities and Exchange Commission, through measures in its sourcing processes. The Company also works with suppliers on this issue and engages in industry initiatives such as the Conflict-Free Sourcing Initiative, driven by the Global e-Sustainability Initiative and the Electronic Industry Citizenship Coalition. Ericsson encourages smelters not yet validated as conflict free to undergo the Conflict-Free Smelter Program audit to ensure their conflict-free status.

Occupational health and safety (OHS)

Providing a safe and healthy work environment is of paramount importance to Ericsson. The Company takes a transparent and inclusive approach, which includes engagement with suppliers. Ericsson has a special focus on suppliers building and servicing networks on behalf of Ericsson. The vision is zero major incidents.

OHS is integrated across operations globally, with a focus on awareness and prevention. In 2016, an Incident Review Board and Global OHS Board were established for overall governance of OHS.

Supporting climate action

At the UN Climate Change Conference of the Parties (COP 22) in Marrakech, Morocco in 2016, industries joined world leaders to support the goals set out in the Paris Agreement, which entered into force on November 4, 2016.

Ericsson is committed to develop and deliver solutions to support climate action. An ongoing priority is improving the life-cycle carbon footprint as part of a broader circular economy approach. The Company works to reduce negative environmental impacts while delivering solutions that enable a low-carbon economy. As energy use of products in operation remains the Company’s most significant environmental impact, Ericsson works with mobile operators to encourage network and site energy optimization, through innovative products, software and solutions. Processes and controls are in place to ensure compliance with relevant product-related environmental, customer and regulatory requirements. An important aspect of Ericsson’s Design for Environment initiatives is materials management and efficiency.

Ericsson has a long-term objective to maintain absolute CO ₂ e emissions from its own activities for business travel, product transportation and facilities energy use in 2017 at the same level as in 2011. To achieve this long-term objective, the Company aims to reduce CO ₂ e emissions per employee by 30% over five years. The Company achieved a 5% reduction of CO ₂ e emissions per employee in 2016.

Over the past five years, CO ₂ e emissions per employee have been reduced by 45% compared to a 2011 baseline. The company met its target to reduce twice as much societal CO ₂ emissions via its product and service offerings in areas such as utilities (smart meters) and transportation as emitted from Ericsson’s own operations.

Radio waves and health

Ericsson employs rigid product testing and installation procedures with the goal of ensuring that radio wave exposure levels from products

Ericsson Annual Report on Form 20-F 2016

and network solutions are below established safety limits. The Company also provides public information on radio waves and health, and supports independent research to further increase knowledge in this area. Since 1996, Ericsson has co-sponsored over 100 studies related to electromagnetic fields and health, primarily through the Mobile Manufacturers Forum.

To assure scientific independence, firewalls were in place between the industrial sponsors and the researchers conducting these studies. Independent expert groups and public health authorities, including the World Health Organization, have reviewed the total amount of research and have consistently concluded that the balance of evidence does not demonstrate any health effects associated with radio wave exposure from either mobile phones or radio base stations.

Reporting in accordance with GRI G4 core

Ericsson publishes an annual Sustainability and Corporate Responsibility report and full key performance data is made available on the Ericsson website according to the Global Reporting Initiative (GRI) Sustainability Reporting Guidelines. The performance data is assured by a third-party.

Legal proceedings

In March 2016, Ericsson and Adaptix Inc. (Adap-tix) reached a settlement agreement, resolving all pending litigation between the parties including the patent infringement lawsuits filed by Adaptix against Ericsson with the US District Court for Eastern District of Texas and with the Tokyo District Court in Japan.

In 2013, Ericsson filed a patent infringement lawsuit in the Delhi High Court against Indian handset company Micromax, seeking damages and an injunction. As part of its defense, Micro-max filed a complaint with the Competition Commission of India (CCI) and the CCI has decided to refer the case to the Director General’s Office for an in-depth investigation. In January 2014, the CCI opened another investigation against Ericsson based on claims made by Intex Technologies (India) Limited. Ericsson has challenged CCI’s jurisdiction in these cases before the Delhi High Court and is waiting for a final decision by the Delhi High Court. Ericsson has made numerous attempts to sign a license agreement with both Micromax and Intex on Fair, Reasonable and Non-discriminatory (FRAND) terms.

In 2012, Wi-LAN Inc., a Canadian patent licensing company, filed a complaint against Ericsson in the US District Court for the Southern District of Florida alleging that Ericsson’s LTE products infringe three of Wi-LAN’s US patents. On May 22, 2015, the Florida Court granted a Motion for Summary Judgment in favor of Ericsson, which judgement was in January 2017 vacated by the Court of Appeals for the Federal Circuit. The case was remanded to the District Court for further proceedings consistent with the Federal Circuit’s opinion.

In 2014, Ericsson was joined as a party to- litigation brought by Unwired Planet against Google, Samsung and Huawei in the English High Court in London, in which Unwired Planet accused the defendants of infringing certain patents, some of which were purchased from Ericsson in 2013. Around the same time Ericsson has also intervened in the similar proceedings ongoing in the Dusseldorf District Court in which the defendants also include HTC and LG. The Defendants’ counter-allegations included that the agreement entered into between Unwired Planet and Ericsson in 2013 for the sale of part of Ericsson’s patent portfolio is invalid because of breach of competition law. Ericsson has rejected these claims. Unwired Planet has since settled its cases with Google and Samsung (both in the UK and Germany). In connection therewith these defendants’ counter-claims against Ericsson have been discontinued.

In a decision issued in January, 2016, the Dusseldorf District Court found that there is no ground for the allegation that Ericsson’ sale of patents to Unwired Planet is not in breach of competition law, and rejected this and all other allegations made by the defendants’ against Ericsson. Ericsson remains as intervener in the German cases. This decision has been appealed.

Further, in October 2016 Huawei withdrew its counterclaim against Ericsson in the UK.

In addition to the proceedings discussed above, the Company is, and in the future may be, involved in various other lawsuits, claims and proceedings incidental to the ordinary course of business.

Parent Company

The Parent Company business consists mainly of corporate management, holding company functions and internal banking activities. It also handles customer credit management, performed on a commission basis by Ericsson Credit AB.

The Parent Company has 5 (5) branch offices. In total, the Group has 79 (81) branch and representative offices.

Financial information

Income after financial items was SEK 15.6 (16.8) billion. The Parent Company had no sales in 2016 or 2015 to subsidiaries, while 43% (43%) of total purchases of goods and services were from such companies.

Ericsson Annual Report on Form 20-F 2016

Major changes in the Parent Company’s financial position for the year included:

•

Increased current and non-current receivables from subsidiaries of SEK 17.1 billion.

•

Decreased gross cash of SEK 5.7 billion.

•

Increased current and non-current liabilities to subsidiaries of SEK 7.6 billion.

At the end of the year, gross cash: cash, cash equivalents, short-term investments, and interest-bearing securities non-current amounted to SEK 42.9 (48.6) billion.

Share information

As of December 31, 2016, the total number of shares in issue was 3,331,151,735, of which 261,755,983 were Class A shares, each carrying one vote, and 3,069,395,752 were Class B shares, each carrying one tenth of one vote. Both classes of shares have the same rights of participation in the net assets and earnings. The two largest shareholders at year-end were Investor AB and AB Industrivärden holding 21.77% and 15.15% respectively of the voting rights in the Parent Company.

In accordance with the conditions of the Long- Term Variable Compensation Program (LTV) for Ericsson employees, 13,275,251 treasury shares were distributed to employees or sold in 2016. The quotient value of these shares was SEK 5.00, totaling SEK 66.4 million, representing less than 1% of capital stock, and compensation received for shares sold and distributed shares amounted to SEK 137.8 million.

The holding of treasury stock at December 31, 2016 was 62,192,390 Class B shares. The quotient value of these shares is SEK 5.00, totaling SEK 311 million, representing 1.9% of capital stock, and the purchase price amounts to SEK 454.3 million.

The Annual General Meeting (AGM) 2016 resolved to issue 26.1 million Class C shares for the Long-Term Variable Remuneration Program (LTV). In accordance with an authorization from the AGM, in the second quarter 2016, the Board of Directors resolved to repurchase the new issued shares, which were subsequently converted into Class B shares. The quotient value of the repurchased shares was SEK 5.00, totaling SEK 130.5 million, representing less than 1% of capital stock, and the acquisition cost was approximately SEK 130.7 million.

Proposed disposition of earnings

The Board of Directors proposes that a dividend of SEK 1.00 (3.70) per share be paid to shareholders duly registered on the record date of March 31, 2017, and that the Parent Company shall retain the remaining part of non-restricted equity. The Class B treasury shares held by the Parent Company are not entitled to receive dividend. Assuming that no treasury shares remain on the record date, the Board of Directors proposes that earnings be distributed as follows:


Amount to be paid to the shareholders			SEK 3,331,151,735
Amount to be retained by the Parent Company			SEK 41,420,521,393
Total non-restricted equity of the Parent Company			SEK 44,751,673,128

As a basis for its dividend proposal, the Board of Directors has made an assessment in accordance with Chapter 18, Section 4 of the Swedish Companies Act of the Parent Company’s and the Group’s need for financial resources as well as the Parent Company’s and the Group’s liquidity, financial position in other respects and long-term ability to meet their commitments. The Group reports an equity ratio of 49.6% (51.8%) and a net cash amount of SEK 31.2 (41.2) billion.

The Board of Directors has also considered the Parent Company’s result and financial position and the Group’s position in general. In this respect, the Board of Directors has taken into account known commitments that may have an impact on the financial positions of the Parent Company and its subsidiaries.

The proposed dividend does not limit the Group’s ability to make investments or raise funds, and it is the Board of Directors’ assessment that the proposed dividend is well-balanced considering the nature, scope and risks of the business activities as well as the capital requirements for the Parent Company and the Group in addition to coming years’ business plans and economic development.

Post-closing events

New segment structure from January 1, 2017

From January 1, 2017, financial reporting is done according to the new structure, i.e., by the new segments Networks, IT & Cloud and Media.

Börje Ekholm takes office as CEO and President

Börje Ekholm takes office as CEO and President. On January 16, 2017, Ericsson announced that in connection with Börje Ekholm assuming the position as President and CEO of Ericsson, Jan Frykhammar, who has temporarily held the position as President and CEO, remains a member of the Executive Leadership Team and is appointed Executive Vice President and Advisor to the CEO. Jan Frykhammar will support Börje Ekholm during a transition period and will focus on corporate governance and efficiency.

Magnus Mandersson remains Executive Vice President, advisor to the CEO, focusing on customer relationships, and a member of the Executive Leadership Team. Magnus Mandersson also remains Chairperson of four out of Ericsson’s ten regions.

Carl Mellander remains acting Chief Financial Officer and a member of the Executive Leadership Team.

Ericsson Annual Report on Form 20-F 2016

Board assurance

The Board of Directors and the President declare that the consolidated financial statements have been prepared in accordance with IFRS, as issued by the IASB and adopted by the EU, and give a fair view of the Group’s financial position and results of operations. The financial statements of the Parent Company have been prepared in accordance with generally accepted accounting principles in Sweden and give a fair view of the Parent Company’s financial position and results of operations.

The Board of Directors’ Report for the Ericsson Group and the Parent Company provides a fair view of the development of the Group’s and the Parent Company’s operations, financial position and results of operations and describes material risks and uncertainties facing the Parent Company and the companies included in the Group.

Ericsson Annual Report on Form 20-F 2016

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of Telefonaktiebolaget LM Ericsson (publ)

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, changes in equity and cash flows present fairly, in all material respects, the financial position of Telefonaktiebolaget LM Ericsson and its subsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board and in conformity with International Financial Reporting Standards as adopted by the European Union. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in “Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and International Standards on Auditing. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

April 26, 2017, Stockholm, Sweden


By:		/s/ PricewaterhouseCoopers
Name:		PricewaterhouseCoopers AB

Ericsson Annual Report on Form 20-F 2016

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated income statement

January–December, SEK million

Notes

2016

2015

2014

Net sales

C3, C4

222,608

246,920

227,983

Cost of sales

–156,243

–161,101

–145,556

Gross income

66,365

85,819

82,427

Gross margin (%)

29,8

34.8

36.2

Research and development expenses

–31,635

–34,844

–36,308

Selling and administrative expenses

–28,866

–29,285

–27,100

Operating expenses

–60,501

–64,129

–63,408

Other operating income and expenses

404

153

–2,156

Share in earnings of joint ventures and associated companies

C3, C12

–38

–56

Operating income

6,299

21,805

16,807

Financial income

–115

525

1,277

Financial expenses

–2,158

–2,458

–2,273

Income after financial items

4,026

19,872

15,811

Taxes

–2,131

–6,199

–4,668

Net income

1,895

13,673

11,143

Net income attributable to:

Stockholders of the Parent Company

1,716

13,549

11,568

Non-controlling interest

179

124

–425

Other information

Average number of shares, basic (million)

3,263

3,249

3,237

Earnings per share attributable to stockholders of the Parent Company, basic
(SEK) ¹⁾

0.53

4.17

3.57

Earnings per share attributable to stockholders of the Parent Company, diluted (SEK) ¹⁾

0.52

4.13

3.54

1)	Based on Net income attributable to stockholders of the Parent Company.

Ericsson Annual Report on Form 20-F 2016

Consolidated statement of comprehensive income

January–December, SEK million

2016

2015

2014

Net income

1,895

13,673

11,143

Other comprehensive income

Items that will not be reclassified to profit or loss

Remeasurements of defined benefits pension plans including asset ceiling

–1,766

–2,026

–10,017

Tax on items that will not be reclassified to profit or loss

520

721

2,218

Items that may be reclassified to profit or loss

Available-for-sale financial assets

Gains/losses arising during the period

–7

—

Revaluation of other investments in shares and participations

Fair value remeasurement

–2

457

Changes in cumulative translation adjustments

4,235

–604

8,734

Share of other comprehensive income of joint ventures and associated companies

–362

141

579

Tax on items that may be reclassified to profit or loss

—

Total other comprehensive income, net of tax

2,619

–1,311

1,566

Total comprehensive income

4,514

12,362

12,709

Total comprehensive income attributable to:

Stockholders of the Parent Company

4,285

12,218

12,981

Non-controlling interests

229

144

–272

Ericsson Annual Report on Form 20-F 2016

Consolidated balance sheet


December 31, SEK million	Notes		2016		2015
Assets
Non-current assets
Intangible assets		C10, C26
Capitalized development expenses				8,076		5,493
Goodwill				43,387		41,087
Intellectual property rights, brands and other intangible assets				7,747		9,316

Property, plant and equipment		C11, C26, C27		16,734		15,901
Financial assets
Equity in joint ventures and associated companies		C12		775		1,210
Other investments in shares and participations		C12		1,179		1,275
Customer finance, non-current		C12		2,128		1,739
Interest-bearing securities, non-current		C12, C20		7,586		—
Other financial assets, non-current		C12		4,442		5,634
Deferred tax assets		C8		15,522		13,183

				107,576		94,838
Current assets
Inventories		C13		30,307		28,436

Trade receivables		C14		68,117		71,069
Customer finance, current		C14		2,625		2,041
Other current receivables		C15		24,431		21,709
Interest-bearing securities, current		C20		13,325		26,046
Cash and cash equivalents		C25		36,966		40,224

				175,771		189,525

Total assets				283,347		284,363

Equity and liabilities
Equity
Stockholders’ equity		C16		139,817		146,525
Non-controlling interest in equity of subsidiaries				675		841

				140,492		147,366
Non-current liabilities
Post-employment benefits		C17		23,723		22,664
Provisions, non-current		C18		946		176
Deferred tax liabilities		C8		2,147		2,472
Borrowings, non-current		C19, C20		18,653		22,744
Other non-current liabilities				2,621		1,851

				48,090		49,907
Current liabilities
Provisions, current		C18		5,411		3,662
Borrowings, current		C19, C20		8,033		2,376
Trade payables		C22		25,318		22,389
Other current liabilities		C21		56,003		58,663

				94,765		87,090

Total equity and liabilities ¹⁾				283,347		284,363

1)	Of which interest-bearing liabilities SEK 26,686 (25,120) million.

Ericsson Annual Report on Form 20-F 2016

Consolidated statement of cash flows

January–December, SEK million

Notes

2016

2015

2014

Operating activities

Net income

1,895

13,673

11,143

Adjustments to reconcile net income to cash

C25

6,112

10,611

11,200

8,007

24,284

22,343

Changes in operating net assets

Inventories

–613

–366

–2,924

Customer finance, current and non-current

–950

824

–710

Trade receivables

5,933

7,000

1,182

Trade payables

2,775

–2,676

1,265

Provisions and post-employment benefits

3,106

544

–859

Other operating assets and liabilities, net

–4,248

–9,013

–1,595

6,003

–3,687

–3,641

Cash flow from operating activities

14,010

20,597

18,702

Investing activities

Investments in property, plant and equipment

C11

–6,129

–8,338

–5,322

Sales of property, plant and equipment

482

1,301

522

Acquisitions of subsidiaries and other operations

C25, C26

–984

–2,201

–4,442

Divestments of subsidiaries and other operations

C25, C26

362

Product development

C10

–4,483

–3,302

–1,523

Other investing activities

–3,004

–543

–3,392

Interest–bearing securities

5,473

5,095

6,596

Cash flow from investing activities

–8,283

–7,987

–7,513

Cash flow before financing activities

5,727

12,610

11,189

Financing activities

Proceeds from issuance of borrowings

1,527

1,179

1,282

Repayment of borrowings

–1,072

–1,336

–9,384

Proceeds from stock issue

131

—

Sale/repurchase of own shares

–26

169

—

Dividends paid

–12,263

–11,337

–9,846

Other financing activities

–39

615

–277

Cash flow from financing activities

–11,742

–10,710

–18,225

Effect of exchange rate changes on cash

2,757

–2,664

5,929

Net change in cash

–3,258

–764

–1,107

Cash and cash equivalents, beginning of period

40,224

40,988

42,095

Cash and cash equivalents, end of period

C25

36,966

40,224

40,988

Ericsson Annual Report on Form 20-F 2016

Consolidated statement of changes in equity

Equity and Other comprehensive income 2016


SEK million	Capital stock		Additional paid in capital		Retained earnings		Stock- holders’ equity			Non- controlling interest		Total equity
January 1, 2016		16,526		24,731		105,268		146,525			841		147,366
Net income
Group		—		—		1,690		1,690			179		1,869
Joint ventures and associated companies		—		—		26		26			—		26

Other comprehensive income
Items that will not be reclassified to profit or loss
Remeasurements related to post-employment benefits
Group		—		—		–1,770		–1,770			4		–1,766
Tax on items that will not be reclassified to profit or loss		—		—		521		521			–1		520
Items that may be reclassified to profit or loss
Available-for-sale financial assets
Gains (+)/Losses (–) arising during the period
Group		—		—		–7		–7			—		–7
Revaluation of other investments in shares and participations
Group		—		—		–2		–2			—		–2
Changes in cumulative translation adjustments
Group		—		—		4,188		4,188	¹⁾		47		4,235
Joint ventures and associated companies		—		—		–362		–362			—		–362
Tax on items that may be reclassified to profit or loss		—		—		1		1			—		1

Total other comprehensive income, net of tax		—		—		2,569		2,569			50		2,619

Total comprehensive income		—		—		4,285		4,285			229		4,514
Transactions with owners
Stock issue		131		—		—		131			—		131
Sale of own shares		—		—		105		105			—		105
Repurchase of own shares		—		—		–131		–131			–190		–321
Stock purchase plans
Group		—		—		957		957			—		957
Dividends paid		—		—		–12,058		–12,058	²⁾		–205		–12,263
Transactions with non-controlling interest		—		—		3		3			—		3

December 31, 2016		16,657		24,731		98,429		139,817			675		140,492

Changes in cumulative translation adjustments include changes regarding revaluation of goodwill in local currency of SEK 2,355 million (SEK 1,592 million in 2015 and 4,794 million in 2014), and realized gain/losses net from sold/liquidated companies, SEK –90 million (SEK –3 million in 2015 and SEK 3 million in 2014).

2)	Dividends paid per share amounted to SEK 3.70 (SEK 3.40 in 2015 and SEK 3.00 in 2014).

Ericsson Annual Report on Form 20-F 2016

Equity and Other comprehensive income 2015


SEK million	Capital stock		Additional paid in capital		Retained earnings		Stock- holders’ equity		Non- controlling interest		Total equity
January 1, 2015		16,526		24,731		103,049		144,306		1,003		145,309
Net income
Group		—		—		13,587		13,587		124		13,711
Joint ventures and associated companies		—		—		–38		–38		—		–38

Other comprehensive income
Items that will not be reclassified to profit or loss
Remeasurements related to post-employment benefits
Group		—		—		–2,033		–2,033		7		–2,026
Tax on items that will not be reclassified to profit or loss		—		—		722		722		–1		721
Items that may be reclassified to profit or loss
Revaluation of other investments in shares and participations
Group		—		—		457		457		—		457
Changes in cumulative translation adjustments
Group		—		—		–618		–618		14		–604
Joint ventures and associated companies		—		—		141		141		—		141

Total other comprehensive income, net of tax		—		—		–1,331		–1,331		20		–1,311

Total comprehensive income		—		—		12,218		12,218		144		12,362
Transactions with owners
Sale/repurchase of own shares		—		—		169		169		—		169
Stock purchase plans
Group		—		—		865		865		—		865
Dividends paid		—		—		–11,033		–11,033		–304		–11,337
Transactions with non-controlling interest		—		—		—		—		–2		–2

December 31, 2015		16,526		24,731		105,268		146,525		841		147,366

Ericsson Annual Report on Form 20-F 2016

Equity and Other comprehensive income 2014


SEK million	Capital stock		Additional paid in capital		Retained earnings		Stock- holders’ equity		Non- controlling interest		Total equity
January 1, 2014		16,526		24,731		98,947		140,204		1,419		141,623
Net income
Group		—		—		11,624		11,624		–425		11,199
Joint ventures and associated companies		—		—		–56		–56		—		–56

Other comprehensive income
Items that will not be reclassified to profit or loss
Remeasurements related to post-employment benefits
Group		—		—		–10,014		–10,014		–3		–10,017
Tax on items that will not be reclassified to profit or loss		—		—		2,218		2,218		—		2,218
Items that may be reclassified to profit or loss
Revaluation of other investments in shares and participations
Group		—		—		47		47		—		47
Changes in cumulative translation adjustments
Group		—		—		8,578		8,578		156		8,734
Joint ventures and associated companies		—		—		579		579		—		579
Tax on items that may be reclassified to profit or loss		—		—		5		5		—		5

Total other comprehensive income, net of tax		—		—		1,413		1,413		153		1,566

Total comprehensive income		—		—		12,981		12,981		–272		12,709
Transactions with owners
Sale/repurchase of own shares		—		—		106		106		—		106
Stock purchase plans
Group		—		—		717		717		—		717
Dividends paid		—		—		–9,702		–9,702		–144		–9,846

December 31, 2014		16,526		24,731		103,049		144,306		1,003		145,309

Ericsson Annual Report on Form 20-F 2016

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

C1 Significant accounting policies

Introduction

The consolidated financial statements comprise Telefonaktiebolaget LM Ericsson, the Parent Company, and its subsidiaries (“the Company”) and the Company’s interests in joint ventures and associated companies. The Parent Company is domiciled in Sweden at Torshamnsgatan 21, SE-164 83 Stockholm.

The consolidated financial statements for the year ended December 31, 2016 have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the EU and RFR 1 “Additional rules for Group Accounting,” related interpretations issued by the Swedish Financial Reporting Board (Rådet för Finansiell Rapportering), and the Swedish Annual Accounts Act. For the financial reporting of 2016, the Company has applied IFRS as issued by the IASB (IFRS effective as per December 31, 2016). There is no difference between IFRS effective as per December 31, 2016, and IFRS as endorsed by the EU, nor is RFR 1 related interpretations issued by the Swedish Financial Reporting Board (Rådet för Finansiell Rapportering) or the Swedish Annual Accounts Act in conflict with IFRS, for all periods presented.

The financial statements were approved by the Board of Directors on February 24, 2017. The balance sheets and income statements are subject to approval by the Annual General Meeting of shareholders.

Amendments applied as from January 1, 2016

There have not been any significant amendments of IFRS concerning the Company during 2016.

The following changes are not due to changes in IFRS:

Presentation in financial statements

In the consolidated Balance sheet, Interest-bearing securities, non-current has been added as a new line and Short term investments has been renamed Interest-bearing securities, current. On the statement of Cash flow, the line Short-term investments has been renamed Interest-bearing securities.

Basis of presentation

The financial statements are presented in millions of Swedish Krona (SEK). They are prepared on a historical cost basis, except for certain financial assets and liabilities that are stated at fair value: derivative financial instruments, financial instruments held for trading, financial instruments classified as available-for-sale and plan assets related to defined benefit pension plans. Financial information in the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of cash flows and the consolidated statement of changes in equity with related notes are presented with two comparison years while for the consolidated balance sheet financial information with related notes is presented with only one comparison year.

Basis of consolidation and composition of the Group

The consolidated financial statements are prepared in accordance with the purchase method. Accordingly, consolidated stockholders’ equity includes equity in subsidiaries, joint ventures and associated companies earned only after their acquisition.

Subsidiaries are all companies for which Telefonaktiebolaget LM Ericsson, directly or indirectly, is the parent. To be classified as a parent, Telefonaktiebolaget LM Ericsson, directly or indirectly, must control another company which requires that the Parent Company has power over that other company, is exposed to variable returns from its involvement and has the ability to use its power over that other company. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that such control ceases.

Intra-group balances and any unrealized income and expense arising from intra-group transactions are fully eliminated in preparing the consolidated financial statements. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.

The Company is composed of a parent company, Telefonaktiebolaget LM Ericsson, with generally fully-owned subsidiaries in many countries of the world. The largest operating subsidiaries are the fully-owned telecom vendor companies Ericsson AB, incorporated in Sweden and Ericsson Inc., incorporated in the US.

Business combinations

At the acquisition of a business, the cost of the acquisition, being the purchase price, is measured as the fair value of the assets given, and liabilities incurred or assumed at the date of exchange, including any cost related to contingent consideration. Transaction costs attributable to the acquisition are expensed as incurred. The acquisition cost is allocated to acquired assets, liabilities and contingent liabilities based upon appraisals made, including assets and liabilities that were not recognized on the acquired entity’s balance sheet, for example intangible assets such as customer relations, brands, patents and financial liabilities. Goodwill arises when the purchase price exceeds the fair value of recognizable acquired net assets. In acquisitions with non-controlling interests full or partial goodwill can be recognized. Final amounts are established within one year after the transaction date at the latest.

In case there is a put option for non-controlling interest in a subsidiary a corresponding financial liability is recognized.

Non-controlling interest

The Company treats transactions with non-controlling interests as transactions with equity owners of the Company. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.

When the Company ceases to have control, any retained interest in the entity is remeasured to its fair value, with the change in carrying amount recognized in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest in an associate or financial asset. In addition, any amounts previously recognized in Other comprehensive income in respect of that entity are accounted for as if the Company had directly disposed of the related assets or liabilities. This may mean that amounts previously recognized in Other comprehensive income are reclassified to profit or loss.

At acquisition, there is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets.

Joint ventures and associated companies

Joint ventures and associated companies are accounted for in accordance with the equity method. Under the equity method, the investment in joint venture or associate is initially recognized at cost and the carrying amount is increased or decreased to recognize the investor’s share of the profit or loss of the investee after the date of acquisition. If the Company’s interest in an associated company is nil, the Company shall not, as prescribed by IFRS, recognize its part of any future losses. Provisions related to obligations for such an interest shall, however, be recognized in relation to such an interest.

Investments in associated companies, i.e., when the Company has significant influence and the power to participate in the financial and operating policy decisions of the associated company, but is not in control or joint control over those policies. Normally, this is the case in voting stock interest, including effective potential voting rights, which stand at least at 20% but not more than 50%.

Ericsson Annual Report on Form 20-F 2016

The Company’s share of income before taxes is reported in item “Share in earnings of joint ventures and associated companies,” included in Operating Income. This reflects the fact that these interests are held for operating rather than investing or financial purposes. Ericsson’s share of income taxes related to associated companies is reported under the line item “Taxes,” in the income statement.

Unrealized gains on transactions between the Company and its joint ventures and associated companies are eliminated to the extent of the Company’s interest in these entities. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

Shares in earnings of joint ventures and associated companies included in consolidated equity which are undistributed are reported in Retained earnings in the balance sheet.

Impairment testing as well as recognition or reversal of impairment of investments in each joint venture and associated company is performed in the same manner as for intangible assets other than goodwill. The entire carrying value of each investment, including goodwill, is tested as a single asset. See also description under “Intangible assets other than goodwill” below.

If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognized in Other comprehensive income are reclassified to profit or loss where appropriate.

In Note C2, “Critical Accounting Estimates and Judgments,” further disclosure is presented in relation to (i) key sources of estimation uncertainty and (ii) the decision made in relation to accounting policies applied.

Foreign currency remeasurement and translation

Items included in the financial statements of each entity of the Company are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Swedish Krona (SEK), which is the Parent Company’s functional and presentation currency.

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of each respective transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, unless deferred in Other comprehensive income under the hedge accounting practices as described below.

Changes in the fair value of monetary securities denominated in foreign currency classified as available-for-sale are analyzed between translation differences resulting from changes in the amortized cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in the amortized cost are recognized in profit or loss, and other changes in the carrying amount are recognized in OCI.

Translation differences on non-monetary financial assets and liabilities are reported as part of the fair value gain or loss.

Group companies

The results and financial position of all the group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet.

Period income and expenses for each income statement are translated at period average exchange rates.

All resulting net exchange differences are recognized as a separate component of Other comprehensive income (OCI).

On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are accounted for in OCI. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in OCI are recognized in the income statement as part of the gain or loss on sale.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

The Company is continuously monitoring the economies with high inflation, the risk of hyperinflation and potential impact on the Company. There is no significant impact due to any currency translation of a hyper-inflationary economy.

Statement of cash flows

The statement of cash flows is prepared in accordance with the indirect method. Cash flows in foreign subsidiaries are translated at the average exchange rate during the period. Payments for subsidiaries acquired or divested are reported as cash flow from investing activities, net of cash and cash equivalents acquired or disposed of respectively.

Cash and cash equivalents consist of cash, bank, and interest-bearing securities that are highly liquid monetary financial instruments with a remaining maturity of three months or less at the date of acquisition.

Revenue recognition

Background

The Company offers a comprehensive portfolio of telecommunication and data communication systems, professional services, and support solutions. Products, both hardware and software as well as services, are in general standardized. The impact of this is that any acceptance terms are normally only formal requirements. In Note C3, “Segment information,” the Company’s products and services are disclosed in more detail as per operating segment.

The Company’s products and services are generally sold under delivery-type or multi-year recurring services contracts. The delivery type contracts often contain content from more than one segment.

Accounting treatment

Sales are based on fair values of consideration received and recorded net of value added taxes, goods returned and estimated trade discounts. Revenue is recognized when risks and rewards have been transferred to the customer, with reference to all significant contractual terms, when:

•

The product or service has been delivered

•

The revenue amount is fixed or determinable

•

The customer has received and activation has been made of separately sold software

•

Collection is reasonably assured

Estimations of contractual performance criteria impact the timing and amounts of revenue recognized and may therefore defer revenue recognition until the performance criteria are met. The profitability of contracts is periodically assessed, and provisions for any estimated losses are made immediately when losses are probable.

Allocation and/or timing criteria specific to each type of contract are:

•

Delivery-type contracts – These contracts relate to delivery, installation, integration of products and provision of related services, normally under multiple elements contracts. Under multiple elements contracts, accounting is based on that the revenue recognition criteria are applied to the separately identifiable components of the contract. Revenue, including the impact of any discount or rebate, is allocated to each element based on relative fair values. Networks, Global Services and Support Solutions have contracts that relate to this type of arrangement.

•

Contracts for services – These relate to multi-year service contracts such as support- and managed service contracts and other types of recurring services. Revenue is recognized when the services have been provided, generally pro rata over the contract period. Global- Services has contracts that relate to this type of arrangement.

•

Contracts generating license fees from third-parties for the use of the Company’s intellectual property rights – License fees are measured based on the substance of the contract. Examples are a percentage of sales or currency amount per unit and recognized over the license period or at a single point of time when no obligations remain. The amount of consideration shall also be reasonably certain. Networks and Support Solutions have contracts that relate to this type of arrangement.

Ericsson Annual Report on Form 20-F 2016

For sales between consolidated companies, associated companies, joint ventures and segments, the Company applies arm’s length pricing.

In Note C2, “Critical accounting estimates and judgments,” a further disclosure is presented in relation to (i) key sources of estimation uncertainty and (ii) the decision made in relation to accounting policies applied.

Earnings per share

Basic earnings per share are calculated by dividing net income attributable to stockholders of the Parent Company by the weighted average number of shares outstanding (total number of shares less treasury stock) during the year.

Diluted earnings per share are calculated by dividing net income attributable to stockholders of the Parent Company, when appropriately adjusted by the sum of the weighted average number of ordinary shares outstanding and dilutive potential ordinary shares. Potential ordinary shares are treated as dilutive when, and only when, their conversion to ordinary shares would decrease earnings per share.

Rights to matching shares are considered dilutive when the actual fulfillment of any performance conditions as of the reporting date would give a right to ordinary shares.

Financial assets

Financial assets are recognized when the Company becomes a party to the contractual provisions of the instrument. Regular purchases and sales of financial assets are recognized on the settlement date.

Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Separate assets or liabilities are recognized if any rights and obligations are created or retained in the transfer.

The Company classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, and available-for-sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.

Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognized at fair value, and transaction costs are expensed in the income statement.

The fair values of quoted financial investments and derivatives are based on quoted market prices or rates. If official rates or market prices are not available, fair values are calculated by discounting the expected future cash flows at prevailing interest rates. Valuations of foreign exchange options and Interest Rate Guarantees (IRG) are made by using the Black-Scholes formula. Inputs to the valuations are market prices for implied volatility, foreign exchange and interest rates.

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss either are designated as such at initial recognition or are financial assets held for trading. A financial asset is classified as held for trading if it is acquired principally for the purpose of selling in the near term.

Derivatives are classified as held for trading, unless they are designated as hedging instruments for the purpose of hedge accounting. Assets held for trading are classified as current assets.

Gains or losses arising from changes in the fair values of the “Financial assets at fair value through profit or loss” category (excluding derivatives) are presented in the income statement within Financial income in the period in which they arise. Derivatives are presented in the income statement either as Cost of sales, Other operating income, Financial income or Financial expense, depending on the intent with the transaction.

Loans and receivables

Receivables, including those that relate to customer financing, are subsequently measured at amortized cost using the effective interest rate method, less allowances for impairment charges. Trade receivables include amounts due from customers. The balance represents amounts billed to customers as well as amounts where risk and rewards have been transferred to the customer but the invoice has not yet been issued.

Collectability of the receivables is assessed for purposes of initial revenue recognition.

Available-for-sale financial assets

Investments in liquid bonds with low credit risk which are not held for trading are classified as available-for-sale. If the maturity is longer than one year the bonds are included in Interest-bearing securities, non-current. Bonds held as available-for-sale with a maturity shorter than one year are included in Interest-bearing securities, current. Unrealized gains and losses are recognized in OCI. When these securities are derecognized, the accumulated fair value adjustments will be included in financial income.

Dividends on available-for-sale equity instruments are recognized in the income statement as part of financial income when the Company’s right to receive payments is established.

Changes in the fair value of monetary securities denominated in a foreign currency and classified as available-for-sale are analyzed between translation differences resulting from changes in the amortized cost of the security and other changes in the carrying amount of the security. Translation differences on monetary securities are recognized in profit or loss; translation differences on non-monetary securities are recognized in OCI. Changes in the fair value of monetary and non-monetary securities classified as available-for-sale are recognized in OCI. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments previously recognized in OCI are included in the income statement.

Impairment

At each balance sheet date, the Company assesses whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered as evidence that the security is impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss – is removed from OCI and recognized in the income statement. Impairment losses recognized in the income statement on equity instruments are not reversed through the income statement.

An assessment of impairment of receivables is performed when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivable. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in the income statement within selling expenses. When a trade receivable is finally established as uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited to selling expenses in the income statement.

Financial liabilities

Financial liabilities are recognized when the Company becomes bound to the contractual obligations of the instrument.

Financial liabilities are derecognized when they are extinguished, i.e., when the obligation specified in the contract is discharged, cancelled or expires.

Borrowings

Borrowings are initially recognized at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any

Ericsson Annual Report on Form 20-F 2016

difference between the proceeds (net of transaction costs) and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest method.

Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

Trade payables

Trade payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method.

Fair value hedging and fair value hedge accounting

The purpose of fair value hedges is to hedge the variability in the fair value of fixed-rate debt (issued bonds) from changes in the relevant benchmark yield curve for its entire term by converting fixed interest payments to a floating rate (e.g., STIBOR or LIBOR) by using interest rate swaps (IRS). The credit risk/spread is not hedged. The fixed leg of the IRS is matched against the cash flows of the hedged bond. Hereby, the fixed-rate bond/ debt is converted into a floating-rate debt in accordance with the policy.

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, when hedge accounting is applied. The Company only applies fair value hedge accounting for hedging fixed interest risk on borrowings. Both gains and losses relating to the interest rate swaps hedging fixed rate borrowings and the changes in the fair value of the hedged fixed rate borrowings attributable to interest rate risk are recognized in the income statement within Financial expenses. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortized to the income statement over the remaining period to maturity.

When applying fair value hedge accounting, derivatives are initially recognized at fair value at trade date and subsequently re-measured at fair value.

At the inception of the hedge, the Company documents the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of the hedged items.

The fair values of various derivative instruments used for hedging purposes are disclosed in Note C20, “Financial risk management and financial instruments.” Movements in the hedging reserve in OCI are shown in Note C16, “Equity and other comprehensive income.”

The fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months, and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as current assets or liabilities.

Financial guarantees

Financial guarantee contracts are initially recognized at fair value (i.e., usually the fee received). Subsequently, these contracts are measured at the higher of:

•

The amount determined as the best estimate of the net expenditure required to settle the obligation according to the guarantee contract.

•

The recognized contractual fee less cumulative amortization when amortized over the guarantee period, using the straight-line-method.

•

The best estimate of the net expenditure comprising future fees and cash flows from subrogation rights.

Inventories

Inventories are measured at the lower of cost or net realizable value on a first-in, first-out (FIFO) basis.

Risks of obsolescence have been measured by estimating market value based on future customer demand and changes in technology and customer acceptance of new products.

A significant part of Inventories is Contract work in progress (CWIP). Recognition and derecognition of CWIP relates to the Company’s revenue recognition principles meaning that costs incurred under a customer contract are recognized as CWIP. When revenue is recognized, CWIP is derecognized and is instead recognized as Cost of sales.

In Note C2, “Critical accounting estimates and judgments,” further disclosure is presented in relation to (i) key sources of estimation uncertainty and (ii) the decision made in relation to accounting policies applied.

Intangible assets

Intangible assets other than goodwill

Intangible assets other than goodwill comprise intangible assets acquired through business combinations, such as patents, customer relations, trademarks and software, as well as capitalized development expenses and separately acquired intangible assets, mainly consisting of software. At initial recognition, acquired intangible assets related to business combinations are stated at fair value and capitalized development expenses and software are stated at cost. Subsequent to initial recognition, these intangible assets are stated at initially recognized amounts less accumulated amortization and any impairment. Amortization and any impairment losses are included in Research and development expenses, which mainly consists of capitalized development expenses and technology; in Selling and administrative expenses, which mainly consists of expenses relating to customer relations and brands; and in Cost of sales.

Costs incurred for development of products to be sold, leased, or otherwise marketed or intended for internal use are capitalized as from when technological and economic feasibility has been established until the product is available for sale or use. Research and development expenses directly related to orders from customers are accounted for as a part of Cost of sales. Other research and development expenses are charged to income as incurred. Amortization of acquired intangible assets, such as patents, customer relations, trademarks, and software, is made according to the straight-line method over their estimated useful lives, not exceeding ten years.

The Company has not recognized any intangible assets with indefinite useful life other than goodwill.

Impairment tests are performed whenever there is an indication of possible impairment. However, intangible assets not yet available for use are tested annually. An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. The recoverable amount is the higher of the value in use and the fair value less costs to sell. In assessing value in use, the estimated future cash flows after tax are discounted to their present value using an after-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Application of after tax amounts in calculation, both in relation to cash flows and discount rate is applied due to that available models for calculating discount rate include a tax component. The after tax discount rate applied by the Company is not materially different from a discounting based on before-tax future cash flows and before-tax discount rates, as required by IFRS.

Corporate assets have been allocated to cash-generating units in relation to each unit’s proportion of total net sales. The amount related to corporate assets is not significant. Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amounts and if the recoverable amount is higher than the carrying value. An impairment loss is reversed only to the extent that the asset’s carrying amount after reversal does not exceed the carrying amount, net of amortization, which would have been reported if no impairment loss had been recognized.

Goodwill

As from the acquisition date, goodwill acquired in a business combination is allocated to each cash-generating unit (CGU) of the Company expected to benefit from the synergies of the combination. The Company’s three operating segments have been identified as CGUs.

Ericsson Annual Report on Form 20-F 2016

An annual impairment test for the CGUs to which goodwill has been allocated is performed in the fourth quarter, or when there is an indication of impairment. Impairment testing as well as recognition of impairment of goodwill is performed in the same manner as for intangible assets other than goodwill: see description under “Intangible assets other than goodwill” above. An impairment loss in respect of goodwill is not reversed.

Additional disclosure is required in relation to goodwill impairment testing: see Note C2, “Critical accounting estimates and judgments” below and Note C10, “Intangible assets.”

Property, plant, and equipment

Property, plant, and equipment consist of real estate, machinery, servers and other technical assets, other equipment, tools and installation and construction in process and advance payment. They are stated at cost less accumulated depreciation and any impairment losses.

Depreciation is charged to income, on a straight-line basis, over the estimated useful life of each component of an item of property, plant, and equipment, including buildings. Estimated useful lives are, in general, 25–50 years for real estate and 3–10 years for machinery and equipment. Depreciation and any impairment charges are included in Cost of sales, Research and development or Selling and administrative expenses.

The Company recognizes in the carrying amount of an item of property, plant, and equipment the cost of replacing a component and derecog-nizes the residual value of the replaced component.

Impairment testing as well as recognition or reversal of impairment of property, plant and equipment is performed in the same manner as for intangible assets other than goodwill: see description under “Intangible assets other than goodwill” above.

Gains and losses on disposals are determined by comparing the proceeds less cost to sell with the carrying amount and are recognized within Other operating income and expenses in the income statement.

Leasing

Leasing when the Company is the lessee

Leases on terms in which the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that type of asset, although the depreciation period must not exceed the lease term.

Other leases are operating leases, and the leased assets under such contracts are not recognized on the balance sheet. Costs under operating leases are recognized in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease.

Leasing when the Company is the lessor

Leasing contracts with the Company as lessor are classified as finance leases when the majority of risks and rewards are transferred to the lessee, and otherwise as operating leases. Under a finance lease, a receivable is recognized at an amount equal to the net investment in the lease and revenue is recognized in accordance with the revenue recognition principles.

Under operating leases the equipment is recorded as property, plant and equipment and revenue as well as depreciation is recognized on a straight-line basis over the lease term.

Income taxes

Income taxes in the consolidated financial statements include both current and deferred taxes. Income taxes are reported in the income statement unless the underlying item is reported directly in equity or OCI. For those items, the related income tax is also reported directly in equity or OCI. A current tax liability or asset is recognized for the estimated taxes payable or refundable for the current year or prior years.

Deferred tax is recognized for temporary differences between the book values of assets and liabilities and their tax values and for tax loss carry-forwards. A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the

deductible temporary differences and tax loss carry-forwards can be utilized. In the recognition of income taxes, the Company offsets current tax receivables against current tax liabilities and deferred tax assets against deferred tax liabilities in the balance sheet, when the Company has a legal right to offset these items and the intention to do so. Deferred tax is not recognized for the following temporary differences: goodwill not deductible for tax purposes, for the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and for differences related to investments in subsidiaries when it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax is measured at the tax rate that is expected to be applied to the temporary differences when they reverse, based on the tax laws that have been enacted or substantively enacted by the reporting date. An adjustment of deferred tax asset/liability balances due to a change in the tax rate is recognized in the income statement, unless it relates to a temporary difference earlier recognized directly in equity or OCI, in which case the adjustment is also recognized in equity or OCI.

The measurement of deferred tax assets involves judgment regarding the deductibility of costs not yet subject to taxation and estimates regarding sufficient future taxable income to enable utilization of unused tax losses in different tax jurisdictions. All deferred tax assets are subject to annual review of probable utilization.

Provisions and contingent liabilities

Provisions are made when there are legal or constructive obligations as a result of past events and when it is probable that an outflow of resources will be required to settle the obligations and the amounts can be reliably estimated. When the effect of the time value of money is material, discounting is made of estimated outflows. However, the actual outflows as a result of the obligations may differ from such estimates.

The provisions are mainly related to warranty commitments, restructuring, customer projects and other obligations, such as unresolved income tax and value added tax issues, claims or obligations as a result of patent infringement and other litigations, supplier claims and customer finance guarantees.

Product warranty commitments consider probabilities of all material quality issues based on historical performance for established products and expected performance for new products, estimates of repair cost per unit, and volumes sold still under warranty up to the reporting date.

A restructuring obligation is considered to have arisen when the Company has a detailed formal plan for the restructuring (approved by management), which has been communicated in such a way that a valid expectation has been raised among those affected. Provision for restructuring is recorded when the Company can reliably estimate the liabilities relating to the obligation. Project related provisions include estimated losses on onerous contracts, contractual penalties and undertakings. For losses on customer contracts, a provision equal to the total estimated loss is recorded when a loss from a contract is anticipated and possible to estimate reliably. These contract loss estimates include any probable penalties to a customer under a loss contract.

Other provisions include provisions for unresolved tax issues, litigations, supplier claims, customer finance and other provisions. The Company provides for estimated future settlements related to patent infringements based on the probable outcome of each infringement. The actual outcome or actual cost of settling an individual infringement may vary from the Company’s estimate.

The Company estimates the outcome of any potential patent infringement made known to the Company through assertion and through the Company’s own monitoring of patent-related cases in the relevant legal systems. To the extent that the Company makes the judgment that an identified potential infringement will more likely than not result in an outflow of resources, the Company records a provision based on the Company’s best estimate of the expenditure required to settle with the counterpart.

In the ordinary course of business, the Company is subject to proceedings, lawsuits and other unresolved claims, including proceedings under

Ericsson Annual Report on Form 20-F 2016

laws and government regulations and other matters. These matters are often resolved over a long period of time. The Company regularly assesses the likelihood of any adverse judgments in or outcomes of these matters, as well as potential ranges of possible losses. Provisions are recognized when it is probable that an obligation has arisen and the amount can be reasonably estimated based on a detailed analysis of each individual issue.

Certain present obligations are not recognized as provisions as it is not probable that an economic outflow will be required to settle the obligation or the amount of the obligation cannot be measured with sufficient reliability. Such obligations are reported as contingent liabilities. For further detailed information, see Note C24, “Contingent liabilities.” In Note C2, “Critical accounting estimates and judgments,” further disclosure is presented in relation to (i) key sources of estimation uncertainty and (ii) the decision made in relation to accounting policies applied.

Post-employment benefits

Pensions and other post-employment benefits are classified as either defined contribution plans or defined benefit plans. Under a defined contribution plan, the Company’s only obligation is to pay a fixed amount to a separate entity (a pension trust fund) with no obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits. The related actuarial and investment risks fall on the employee. The expenditures for defined contribution plans are recognized as expenses during the period when the employee provides service.

Under a defined benefit plan, it is the Company’s obligation to provide agreed benefits to current and former employees. The related actuarial and investment risks fall on the Company.

The present value of the defined benefit obligations for current and former employees is calculated using the Projected Unit Credit Method. The discount rate for each country is determined by reference to market yields on high-quality corporate bonds that have maturity dates approximating the terms of the Company’s obligations. In countries where there is no deep market in such bonds, the market yields on government bonds are used. The calculations are based upon actuarial assumptions, assessed on a quarterly basis, and are as a minimum prepared annually. Actuarial assumptions are the Company’s best estimate of the variables that determine the cost of providing the benefits. When using actuarial assumptions, it is possible that the actual results will differ from the estimated results or that the actuarial assumptions will change from one period to another. These differences are reported as actuarial gains and losses. They are, for example, caused by unexpectedly high or low rates of employee turnover, changed life expectancy, salary changes, remeasurement of plan assets and changes in the discount rate. Actuarial gains and losses are recognized in OCI in the period in which they occur. The Company’s net liability for each defined benefit plan consists of the present value of pension commitments less the fair value of plan assets and is recognized net on the balance sheet. When the result is a net benefit to the Company, the recognized asset is limited to the present value of any future refunds from the plan or reductions in future contributions to the plan.

Interest cost on the defined benefit obligation and interest income on plan assets is calculated as a net interest amount by applying the discount rate to the net defined benefit liability. All past service costs are recognized immediately. Swedish special payroll tax is accounted for as a part of the pension cost and the pension liability respectively.

Payroll taxes related to actuarial gains and losses are included in determining actuarial gains and losses, reported under OCI.

In Note C2, “Critical accounting estimates and judgments,” further disclosure is presented in relation to key sources of estimation uncertainty.

Share-based compensation to employees and the Board of Directors

Share-based compensation is related to remuneration to all employees, including key management personnel and the Board of Directors.

Under IFRS, a company shall recognize compensation costs for share-based compensation programs based on a measure of the value to the company of services received under the plans.

This value is based on the fair value of, for example, free shares at grant date, measured as stock price as per each investment date. The value at grant date is charged to the income statement as any other remuneration over the service period. For example, value at grant date is 90. Given the normal service period of three years within Ericsson, 30 would be charged per year during the service period.

The amount charged to the income statement is reversed in equity each time of the income statement charge.

The reason for this IFRS accounting principle is that compensation cost is a cost with no direct cash flow impact. The purpose of share-based accounting according to IFRS (IFRS 2) is to present the impact of share-based programs, being part of the total remuneration, in the income statement.

Compensation to employees

Stock purchase plans

For stock purchase plans, compensation costs are recognized during the vesting period, based on the fair value of the Ericsson share at the employee’s investment date. The fair value is based upon the share price at investment date, adjusted for the fact that no dividends will be received on matching shares prior to matching and other features that are non- vesting conditions. The employee pays a price equal to the share price at investment date for the investment shares. The investment date is considered as the grant date. In the balance sheet, the corresponding amounts are accounted for as equity. Vesting conditions are non-market-based and affect the number of shares that Ericsson will match. Other features of a share-based payment are non-vesting conditions. These features would need to be included in the grant date fair value for transactions with employees and others providing similar services. Non-vesting conditions would not impact the number of awards expected to vest or valuation thereof subsequent to grant date. When calculating the compensation costs for shares under performance-based matching programs, the Company at each reporting date assesses the probability that the performance targets will be met. Compensation expenses are based on estimates of the number of shares that will match at the end of the vesting period. When shares are matched, social security charges are to be paid in certain countries on the value of the employee benefit. The employee benefit is generally based on the market value of the shares at the matching date. During the vesting period, estimated amounts for such social security charges are expensed and accrued.

Compensation to the Board of Directors

During 2008, the Parent Company introduced a share-based compensation program as a part of the remuneration to the Board of Directors. The program gives non-employee Directors elected by the General Meeting of Shareholders a right to receive part of their remuneration as a future payment of an amount which corresponds to the market value of a share of class B in the Parent Company at the time of payment, as further disclosed in Note C28, “Information regarding members of the Board of Directors, the Group management and employees.” The cost for cash settlements is measured and recognized based on the estimated costs for the program on a pro rata basis during the service period, being one year. The estimated costs are remeasured during and at the end of the service period.

Segment reporting

An operating segment is a component of a company whose operating results are regularly reviewed by the Company’s chief operating decision maker, (CODM), to make decisions about resources to be allocated to the segment and assess its performance. The President and the Chief Executive Officer is defined as the CODM function in the Company.

The segment presentation, as per each segment, is based on the Company’s accounting policies as disclosed in this note. The arm’s length principle is applied in transactions between the segments.

The Company’s segment disclosure about geographical areas is based on the country in which transfer of risks and rewards occur.

New standards and interpretations not yet adopted

A number of issued new standards, amendments to standards and interpretations are not yet effective for the year ended December 31, 2016 and have not been applied in preparing these consolidated financial statements.

Ericsson Annual Report on Form 20-F 2016

Below is a list of applicable standards/interpretations that have been issued and are effective for periods as described per standard.

IFRS 9, “Financial instruments.” The complete version of IFRS 9 replaces most of the guidance in IAS 39. IFRS 9 retains but simplifies the-mixed measurement model and establishes three primary measurement-categories for financial assets: amortized cost, fair value through OCI and fair value through profit or loss. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. IFRS 9 also amends the principles for hedge accounting. This standard is effective as from January 1, 2018. The Company has not yet finalized the evaluation of any impact on financial result or position.

IFRS 15, “Revenue from Contracts with Customers,” establishes a new principle based model of recognizing revenue from customer contracts. This is a five-step model that requires revenue to be recognized as control over goods and services are transferred to the customer. IFRS 15 will be effective for implementation on January 1, 2018. The Company has evaluated the resulting changes to accounting principles and internal processes due to the new revenue recognition model and is currently implementing the changes in line with the implementation date January 1, 2018. The Company is currently assessing the impact of the implementation of the standard at transition date, including impact on the comparative numbers for prior reporting periods. This exercise is yet to be completed, therefore it is not practicably possible to disclose reliable estimates of the impact on financial statements at the transition date. The standard provides a choice of two transition methods, full retrospective or cumulative effect method. The full retrospective method requires restatement of prior year comparatives and adjustment to equity to the earliest presented comparative period, i.e. January 1, 2016, whereas with the cumulative effect method, the impact is adjusted to equity at the transition date of January 1, 2018. The Company has not decided on the transition method to be adopted at January 1, 2018 but will consider factors such as materiality of the impact on prior reporting periods (when reliably estimated), practicalities and costs of data gathering, in arriving at the decision.

IFRS 16 “Leases”. In January 2016, IASB issued a new lease standard that will replace IAS 17 Leases and the related interpretations IFRIC 4, SIC-15 and SIC-27. The standard requires assets and liabilities arising from all leases, with some exceptions, to be recognized on the balance sheet. This model reflects that, at the start of a lease, the lessee obtains the right to use an asset for a period of time and has an obligation to pay for that right. The accounting for lessors will be based on the same classification as under IAS 17, operating or finance leasing. The definition of a lease is amended. The standard is effective for annual periods beginning on or after January 1, 2019. Early adoption is permitted. EU has not yet adopted the standard. The Company will apply the new standard as from January 1, 2019. The initial assessment indicates that the main impact on the balance sheet is expected, where the Company is the lessee, primarily in contracts for real estate and vehicles.

C2 Critical accounting estimates and judgments

The preparation of financial statements and application of accounting standards often involve management’s judgment and the use of estimates and assumptions deemed to be reasonable at the time they are made. However, other results may be derived with different judgments or using different assumptions or estimates, and events may occur that could require a material adjustment to the carrying amount of the asset or liability affected. Following are the most important accounting policies subject to such judgments and the key sources of estimation uncertainty that the Company believes could have the most significant impact on the reported results and financial position.

The information in this note is grouped as per:

•

Key sources of estimation uncertainty

•

Judgments management has made in the process of applying the Company’s accounting policies.

Revenue recognition

Key sources of estimation uncertainty

Examples of estimates of total contract revenue and cost that are necessary are the assessing of customer possibility to reach conditional purchase volumes triggering contractual discounts to be given to the customer, the impact on the Company revenue in relation to performance criteria and whether any loss provisions shall be made. As disclosed in note C3 “Segment information” there is no customer for which revenues exceeds 10% of the Company’s total revenue. It is, however, also disclosed that most of the sales are derived from large, multi-year agreements with a limited number of significant customers.

For further discussion on revenue recognition, see Note C1, “Significant accounting policies” and Note C4, “Net sales.”

Judgments made in relation to accounting policies applied

Parts of the Company’s sales are generated from large and complex customer contracts. Managerial judgment is applied regarding, among other aspects, conformance with acceptance criteria and if transfer of risks and rewards to the buyer have taken place to determine if revenue and costs should be recognized in the current period, degree of completion and the customer credit standing to assess whether payment is likely or not to justify revenue recognition.

Trade and customer finance receivables

Key sources of estimation uncertainty

The Company monitors the financial stability of its customers and the environment in which they operate to make estimates regarding the likelihood that the individual receivables will be paid. Total allowances for estimated losses as of December 31, 2016, were SEK 1.7 (1.5) billion or 2.2% (2.0%) of gross trade and customer finance receivables. For further detailed information, see Note C14, “Trade receivables and customer finance.”

Credit risks for outstanding customer finance credits are regularly assessed as well, and allowances are recorded for estimated losses.

Inventory valuation

Key sources of estimation uncertainty

Inventories are valued at the lower of cost and net realizable value. Estimates are required in relation to forecasted sales volumes and inventory balances. In situations where excess inventory balances are identified, estimates of net realizable values for the excess volumes are made. Inventory allowances for estimated losses as of December 31, 2016, amounted to SEK 2.4 (2.6) billion or 7% (8%) of gross inventory. For further detailed information, see Note C13, “Inventories.”

Deferred taxes

Key sources of estimation uncertainty

Deferred tax assets and liabilities are recognized for temporary differences and for tax loss carry-forwards. Deferred tax is recognized net of

Ericsson Annual Report on Form 20-F 2016

valuation allowances. The valuation of temporary differences and tax loss carry-forwards, is based on management’s estimates of future taxable profits in different tax jurisdictions against which the temporary differences and loss carry-forwards may be utilized.

The largest amounts of tax loss carry-forwards are reported in Sweden, with an indefinite period of utilization (i.e. with no expiry date). For further detailed information, please refer to Note C8, “Taxes.”

At December 31, 2016, the value of deferred tax assets amounted to SEK 15.5 (13.2) billion. The deferred tax assets related to loss carry-forwards are reported as non-current assets.

Accounting for income tax, value added tax, and other taxes

Key sources of estimation uncertainty

Accounting for these items is based upon evaluation of income, value added and other tax rules in all jurisdictions where the Company performs activities. The total complexity of rules related to taxes and the accounting for these require management’s involvement in judgments regarding classification of transactions and in estimates of probable outcomes of claimed deductions and/or disputes.

Acquired intellectual property rights and other intangible assets, including goodwill

Key sources of estimation uncertainty

At initial recognition, future cash flows are estimated, to ensure that the initial carrying values do not exceed the expected discounted cash flows for the items of this type of assets. After initial recognition, impairment testing is performed whenever there is an indication of impairment, except in the case of goodwill for which impairment testing is performed at least once per year. Negative deviations in actual cash flows compared to estimated cash flows as well as new estimates that indicate lower future cash flows might result in recognition of impairment charges.

For further discussion on goodwill, see Note C1, “Significant accounting policies” and Note C10, “Intangible assets.” Estimates related to acquired intangible assets are based on similar assumptions and risks as for goodwill. In Note C10 “Intangible assets,” it is disclosed that for the Media segment the headroom is SEK 5.6 billion when a discount of 8.0% is applied. The recoverable amount is equal to its carrying amount when the discount factor is increased to 10.0%. For more information, see Note C10, “Intangible assets.”

At December 31, 2016, the amount of acquired intellectual property rights and other intangible assets amounted to SEK 51.1 (50.4) billion, including goodwill of SEK 43.4 (41.1) billion.

Judgments made in relation to accounting policies applied

At initial recognition and subsequent remeasurement, management judgments are made, both for key assumptions and regarding impairment indicators. In the purchase price allocation made for each acquisition, the purchase price shall be assigned to the identifiable assets, liabilities and contingent liabilities based on fair values for these assets. Any remaining excess value is reported as goodwill.

This allocation requires management judgment as well as the definition of cash-generating units for impairment testing purposes. Other judgments might result in significantly different results and financial position in the future.

Provisions

Key sources of estimation uncertainty

Provisions mainly comprise amounts related to restructuring, warranty, contractual obligations and penalties to customers and estimated losses on customer contracts, risks associated with patent and other litigations, supplier or subcontractor claims and/or disputes, as well as provisions for unresolved income tax and value added tax issues. In relation to restructuring, the Company is executing a cost and efficiency program that was first initiated in the last quarter of 2014 and then expanded in the second quarter of 2016. The estimates related to the amounts of provisions for restructuring, penalties, claims or losses receive special attention from the management. At December 31, 2016, provisions amounted to SEK 6.4 (3.8) billion. For further detailed information, see Note C18, “Provisions.”

Judgments made in relation to accounting policies applied

Whether a present obligation is probable or not requires judgment. The nature and type of risks for these provisions differ and management’s judgment is applied regarding the nature and extent of obligations in deciding if an outflow of resources is probable or not.

Contingent liabilities

Key sources of estimation uncertainty

As disclosed under ‘Provisions’ there are uncertainties in the estimated amounts. The same type of uncertainty exists for contingent liabilities.

Judgments made in relation to accounting policies applied

As disclosed under Note C1, “Significant accounting policies” a potential obligation that is not likely to result in an economic outflow is classified as a contingent liability, with no impact on the Company’s financial statements. However, should an obligation in a later period be deemed to be probable, then a provision shall be recognized, impacting the financial statements.

Pension and other post-employment benefits

Key sources of estimation uncertainty

Accounting for the costs of defined benefit pension plans and other applicable post-employment benefits is based on actuarial valuations, relying on key estimates for discount rates, future salary increases, employee turnover rates and mortality tables. The discount rate assumptions are based on rates for high-quality fixed-income investments with durations as close as possible to the Company’s pension plans. In countries where there is not a deep market in high-quality corporate bonds, the market yields on government bonds shall be applied. As of 2015, due to the market situation in Sweden, the Company has applied yields on Swedish government bonds for the calculation of the defined benefit obligation in Sweden. The discount rate applied in Sweden was 1.8% (2.1%). At December 31, 2016, defined benefit obligations for pensions and other post-employment benefits amounted to SEK 87.2 (78.1) billion and fair value of plan assets to SEK 64.5 (58.2) billion. For more information on estimates and assumptions, see Note C17, “Post-employment benefits.”

Foreign exchange risks

Key sources of estimation uncertainty

Foreign exchange risk impacts the financial results of the Company: see further disclosure in Note C20, “Financial risk management and financial instruments,” under Foreign exchange risk.

Ericsson Annual Report on Form 20-F 2016

C3 Segment information

Operating segments

When determining Ericsson’s operating segments, consideration has been given to which markets and what type of customers the products and services aim to attract, as well as the distribution channels they are sold through. Commonality regarding technology, research and development has also been taken into account. To best reflect the business focus and to facilitate comparability with peers, three operating segments are reported:

•

Networks

•

Global Services

•

Support Solutions

•

(Modems, closed during second half of 2015)

Networks delivers products and solutions for mobile access, IP and transmission networks, core networks and cloud. The offering includes:

•

Radio access solutions that interconnect with devices such as mobile phones, tablets and PCs.

•

IP routing and transport solutions including routers, Ericsson’s evolved IP network as well as backhaul including microwave (MINI-LINK) and optical transmission solutions for mobile and fixed networks

•

Core networks are based on the Ericsson Blade Server platform and include solutions such as the IMS

•

A cloud platform that can handle all types of workloads for all clouds; telecom cloud, IT cloud and commercial cloud.

Global Services delivers managed services, product-related services, consulting and systems integration services as well as broadcast and media services. The offering includes:

•

Managed Services: Services for designing, building, operating and managing the day-to-day operations of the customer’s network or solution; maintenance; network sharing solutions; plus shared solutions such as hosting of platforms and applications. Ericsson also offers managed services of IT environments.

•

Product-related services: Services to expand, upgrade, restructure or migrate networks; network-rollout services; customer support; network design and optimization services.

•

Consulting and Systems Integration: Technology and operational consulting; integration of multi-vendor equipment; design and integration of new solutions and transforming programs.

•

Broadcast Services: Services include responsibility for technical platforms and operational services related to TV content management, playout and service provisioning.

Support Solutions provides software suites for operators. The offering includes:

•

Operations Support Systems: plan, build and optimize, service fulfillment and service assurance.

•

Business Support Systems: revenue management (prepaid, post-paid, convergent charging and billing), mediation and customer care solutions.

•

TV & Media solutions: a suite of open, standards-based solutions and products for the creation, management and delivery of TV on any device over any network, including a TV platform for content creation, content management, on-demand video delivery, advanced video compression and video-optimized delivery network infrastructure.

•

M-Commerce solutions for money transfer: payment transactions and services between mobile subscribers and operators or other service providers.

Modems performed design, development and sales of the LTE multimode thin modems solutions, including 2G, 3G and 4G interoperability. Modems was consolidated into Ericsson in late 2013. Since the integration, the addressable market for thin modems has been reduced. In addition, there is strong competition, price erosion and an accelerating pace of technology innovation. As a consequence, Ericsson announced, on September 18, 2014, the discontinuation of further development of modems. Modems have had no impact on Group profit and loss from the second half of 2015.

Unallocated

Some revenues, costs, assets and liabilities are not identified as part of any operating segment and are therefore not allocated. Examples of such items are costs for corporate staff, IT costs and general marketing costs.

Regions

The Regions are the Company’s primary sales channel. The Company operates worldwide and reports its operations divided into ten geographical regions and one region Other:

•

North America

•

Latin America

•

Northern Europe & Central Asia

•

Western and Central Europe

•

Mediterranean

•

Middle East

•

Sub-Saharan Africa

•

India

•

North East Asia

•

South East Asia & Oceania

•

Other.

Region “Other” includes licensing revenues, broadcast services, power modules, mobile broadband modules, Ericsson-LG Enterprise and other businesses.

Major customers

The Company does not have any customer for which revenues from transactions have exceeded 10% of the Company’s total revenues for the years 2016, 2015 or 2014.

Ericsson derives most of its sales from large, multi-year agreements with a limited number of significant customers. Out of a customer base of more than 500, mainly consisting of network operators, the 10 largest customers accounted for 46% (46%) of net sales. The largest customer accounted for approximately 7% (7%) of sales in 2016.

For more information, see Risk Factors, “Market, Technology and Business Risks.”

Marketing channels

Marketing in a business-to-business environment is expanding, from being primarily conducted through personal meetings, to on-line forums, expert blogs and social media. Ericsson performs marketing through:

•

Customer engagement with a consultative approach

•

Selective focus on events and experience centers for customer experience and interaction

•

Continuous dialogue with customers and target audiences through social and other digital media (including virtual events)

•

Activation of the open social and digital media landscape to strengthen message reach and impact

•

Execution of solutions-driven programs, aligned globally and regionally.

New segment structure from January 1, 2017

From January 1, 2017, segment reporting is based on a new structure, with three new operating segments:

•

Segment Networks. Products and services with a focus on evolving and managing our customers’ telecom networks. The portfolio of radio networks and backhaul solutions are based on industry standards and can also be industrialized and adjusted to meet the demands of other industry verticals as utilities, transport and public safety. In addition, Ericsson services capabilities address operator demand in an increasingly complex network environment.

•

Segment IT & Cloud. Products and services providing solutions for our customers’ digital transformation journeys across the Support Systems, Telecom core and IT Cloud domains through a combination of products, technology and expertise in networks, software, cloud and business processes.

•

Segment Media. Products and services that enable content owners, broadcasters, TV service providers and network operators to efficiently deliver, manage and monetize new TV experiences.

Ericsson Annual Report on Form 20-F 2016

Operating segments 2016

Networks

Global
Services

Support
Solutions

Total
Segments

Unallocated

Group

Segment sales

108,338

101,722

12,548

222,608

—

222,608

Net sales

108,338

101,722

12,548

222,608

—

222,608

Operating income

4,727

3,308

–951

7,084

–785

6,299

Operating margin (%)

–8

—

Financial income

–115

Financial expenses

–2,158

Income after financial items

4,026

Taxes

–2,131

Net income

1,895

Other segment items

Share in earnings of JV and associated companies

–37

Amortization

–2,320

–869

–1,276

–4,465

—

–4,465

Depreciation

–3,018

–1,207

–196

–4,421

—

–4,421

Impairment losses

–107

–42

–92

–241

—

–241

Reversals of impairment losses

—

Restructuring expenses

–4,040

–2,984

–449

–7,473

–94

–7,567

Gains/losses from divestments

–15

—

–15

138

123

Operating segments 2015

Networks

Global
Services

Support
Solutions

Modems ¹⁾

Total
Segments

Unallocated

Group

Segment sales

123,720

108,018

15,049

133

246,920

—

246,920

Net sales

123,720

108,018

15,049

133

246,920

—

246,920

Operating income

12,943

8,215

1,504

22,669

–864

21,805

Operating margin (%)

—

Financial income

525

Financial expenses

–2,458

Income after financial items

19,872

Taxes

–6,199

Net income

13,673

Other segment items

Share in earnings of JV and associated companies

–95

–33

—

–85

–38

Amortization

–3,327

–1,029

–1,118

—

–5,474

–44

–5,518

Depreciation

–3,197

–1,212

–188

–108

–4,705

—

–4,705

Impairment losses

–20

—

–20

—

–20

Reversals of impairment losses

—

Restructuring expenses

–2,839

–1,681

–480

–15

–5,015

–25

–5,040

Gains/losses from divestments

—

–50

–49

1)	Modems was closed during second half of 2015.

Ericsson Annual Report on Form 20-F 2016

Operating segments 2014

Networks

Global
Services

Support
Solutions

Modems

Total
Segments

Unallocated

Group

Segment sales

117,487

97,659

12,655

182

227,983

—

227,983

Net sales

117,487

97,659

12,655

182

227,983

—

227,983

Operating income

13,544

6,067

–31

–2,025

17,555

–748

16,807

Operating margin (%)

—

Financial income

1,277

Financial expenses

–2,273

Income after financial items

15,811

Taxes

–4,668

Net income

11,143

Other segment items

Share in earnings of JV and associated companies

–52

—

–69

–56

Amortization

–3,497

–1,036

–902

–168

–5,603

–5,598

Depreciation

–3,225

–820

–124

–160

–4,329

—

–4,329

Impairment losses

–34

–1

–2

—

–37

—

–37

Reversals of impairment losses

—

Restructuring expenses

–443

–835

–146

–32

–1,456

—

–1,456

Gains/losses from divestments

—

–36

Regions


	Net sales						Non-current assets ⁵⁾
	2016		2015		2014		2016		2015		2014
North America ³⁾		54,747		58,261		54,509		14,650		14,870		16,148
Latin America		17,933		21,357		22,570		1,543		1,321		1,749
Northern Europe & Central Asia ¹⁾²⁾		9,069		10,649		12,373		53,647		48,910		43,868
Western & Central Europe ²⁾		16,210		19,732		19,706		3,499		3,886		4,227
Mediterranean ²⁾		20,905		23,310		23,003		1,048		1,208		1,389
Middle East		19,156		22,849		21,277		50		99		100
Sub-Saharan Africa		9,177		10,349		8,749		36		40		54
India		10,748		13,381		7,702		458		390		471
North East Asia ⁴⁾		27,365		28,237		27,572		1,556		2,005		2,217
South East Asia & Oceania		22,180		19,235		15,858		232		278		345
Other ^1)2)3)4)		15,118		19,560		14,664		—		—		—

Total		222,608		246,920		227,983		76,719		73,007		70,568
1) Of which in Sweden ⁶⁾		3,123		3,796		4,144		53,111		48,467		43,298
2) Of which in EU ⁶⁾		38,525		45,585		45,101		57,759		53,759		48,881
3) Of which in the United States ⁶⁾		56,748		64,299		55,722		11,053		12,325		13,116
4) Of which in China ⁶⁾		19,156		18,977		14,335		530		1,547		1,370

5)	Total non-current assets excluding financial instruments, deferred tax assets, and post-employment benefit assets.

6)	Including IPR revenue reported under Other above.

For employee information, see Note C28, “Information regarding members of the Board of Directors, the Group management and employees.”

Ericsson Annual Report on Form 20-F 2016

C4 Net sales

Net sales


	2016		2015		2014
Sales of products and network rollout services		135,778		150,775		147,235
Professional Services sales		76,816		81,749		70,831
License revenues		10,014		14,396		9,917

Net sales		222,608		246,920		227,983
Export sales from Sweden		107,036		117,486		113,734

C5 Expenses by nature

Expenses by nature


	2016		2015		2014
Goods and services		133,848		137,458		132,185
Employee remuneration		77,774		80,054		70,166
Amortization and depreciation		8,886		10,223		9,927
Impairments and obsolescence allowances, net of reversals		1,325		1,438		1,138
Financial expenses		2,158		2,458		2,273
Taxes		2,131		6,199		4,668

Expenses incurred		226,122		237,830		220,357
Inventory increase/decrease (–/+) ¹⁾		–606		–394		–2,929
Additions to capitalized development		–4,483		–3,548		–1,523

Expenses charged to the income statement		221,033		233,888		215,905

1)	The inventory changes are based on changes of net inventory values.

Total restructuring charges in 2016 were SEK 7.6 (5.0) billion and were mainly related to the cost and efficiency program initially announced in November 2014. Restructuring charges are included in the expenses presented above.

Restructuring charges by function


	2016		2015		2014
Cost of sales		3,475		2,274		1,029
R&D expenses		2,739		2,021		304
Selling and administrative expenses		1,353		745		123

Total restructuring charges		7,567		5,040		1,456

C6 Other operating income and expenses

Other operating income and expenses

2016

2015

2014

Gains on sales of intangible assets and PP&E

423

363

843

Losses on sales of intangible assets and PP&E

–509

–158

–935

Gains on sales of investments and operations ¹⁾

219

Losses on sales of investments and operations ¹⁾

–96

–50

–44

Capital gains/losses, net

156

–128

Other operating revenues/expenses ²⁾

367

–3

–2,028

Total other operating income and expenses

404

153

–2,156

1)	Includes divestments presented in Note C26 “Business combinations.”

2)	Includes revaluation of cash flow hedges of SEK –0.9 billion (SEK –1.1 billion in 2015 and SEK –2.8 billion in 2014) partly offset by result from trading activities.

C7 Financial income and expenses

Financial income and expenses

2016

2015

2014

Financial
income

Financial
expenses

Financial
income

Financial
expenses

Financial
income

Financial
expenses

Contractual interest on financial assets

—

385

—

713

—

Of which on financial assets at fair value through profit or loss

–316

—

–110

—

297

—

Contractual interest on financial liabilities

—

–1,355

—

–1,428

—

–1,376

Net gains/losses on:

Instruments at fair value through profit or loss ¹⁾

–68

–729

190

–760

624

–651

Of which included in fair value hedge relationships

—

152

—

–123

Loans and receivables

–79

—

–53

—

–70

—

Liabilities at amortized cost

—

218

—

213

—

–32

Other financial income and expenses

—

–292

–483

–214

Total

–115

–2,158

525

–2,458

1,277

–2,273

1)	Excluding net loss from operating assets and liabilities, SEK 234 million (net loss of SEK 165 million in 2015 and net loss of SEK 143 million in 2014), reported as Cost of sales.

Ericsson Annual Report on Form 20-F 2016

C8 Taxes

The Company’s tax expense for 2016 was SEK –2,131 (–6,199) million or 52.9% (31.2%) of income after financial items. The tax rate may vary between years depending on business and geographical mix.

Income taxes recognized in the income statement

2016

2015

2014

Current income taxes for the year

–3,654

–6,641

–5,714

Current income taxes related to prior years

–489

¹⁾

–104

–66

Deferred tax income/expense (+/–)

2,017

546

1,112

Share of taxes in joint ventures and associated companies

–5

—

Tax expense

–2,131

–6,199

–4,668

1)	The amount refers to a change in an estimate.

A reconciliation between reported tax expense for the year and the theoretical tax expense that would arise when applying statutory tax rate in Sweden, 22.0%, on the consolidated income before taxes, is shown in the table below.

Reconciliation of Swedish income tax rate with effective tax rate

2016

2015

2014

Expected tax expense at Swedish tax rate 22.0%

–886

–4,372

–3,479

Effect of foreign tax rates

–536

–1,101

–856

Of which joint ventures and associated companies

—

–2

Current income taxes related to prior years

–489

–104

–66

Remeasurement of tax loss carry-forwards

143

–250

–51

Remeasurement of deductible temporary differences

119

185

–459

Tax effect of non-deductible expenses

–1,357

–1,559

–2,125

Tax effect of non-taxable income

935

981

2,383

Tax effect of changes in tax rates

–60

–15

Tax expense

–2,131

–6,199

–4,668

Effective tax rate

52.9

31.2

29.5

Deferred tax balances

Deferred tax assets and liabilities are derived from the balance sheet items as shown in the table below.

Tax effects of temporary differences and tax loss carry-forwards

Deferred
tax assets

Deferred
tax liabilities

Net balance

2016

Intangible assets and property, plant and equipment

1,223

4,173

Current assets

2,352

501

Post-employment benefits

4,382

692

Provisions

1,631

Other

4,557

274

Loss carry-forwards

4,883

—

Deferred tax assets/liabilities

19,028

5,653

13,375

Netting of assets/liabilities

–3,506

Deferred tax balances, net

15,522

2,147

13,375

2015

Intangible assets and property, plant and equipment

1,056

4,032

Current assets

2,218

568

Post-employment benefits

4,247

776

Provisions

1,813

Other

2,799

204

Loss carry-forwards

4,241

—

Deferred tax assets/liabilities

16,374

5,663

10,711

Netting of assets/liabilities

–3,191

Deferred tax balances, net

13,183

2,472

10,711

Changes in deferred taxes, net


	2016		2015
Opening balance, net		10,711		9,601
Recognized in Net income		2,017		546
Recognized in Other comprehensive income		521		721
Acquisitions/disposals of subsidiaries		–57		121
Currency translation differences		183		–278

Closing balance, net		13,375		10,711

Tax effects reported directly in Other comprehensive income amount to SEK 521 (721) million, of which actuarial gains and losses related to pensions constituted SEK 520 (721) million.

Deferred tax assets are only recognized in countries where the Company expects to be able to generate corresponding taxable income in the future to benefit from tax reductions.

Significant tax loss carry-forwards are related to countries with long or indefinite periods of utilization, mainly Sweden and Germany. Of the total SEK 4,883 (4,241) million recognized deferred tax assets related to tax loss carry-forwards, SEK 3,774 (3,378) million relates to Sweden with indefinite periods of utilization. The assessment is that the Company will be able to generate sufficient income in the coming years to also utilize the remaining part of the recognized amounts.

Ericsson Annual Report on Form 20-F 2016

Tax loss carry-forwards

Deferred tax assets regarding tax loss carry-forwards are reported to the extent that realization of the related tax benefit through future taxable profits is probable also when considering the period during which these can be utilized, as described below.

As of December 31, 2016, the recognized tax loss carry-forwards amounted to SEK 20,929 (18,162) million. The tax value of these tax loss carry-forwards is reported as an asset.

The final years in which the recognized tax loss carry-forwards can be utilized are shown in the following table.

Tax loss carry-forwards: year of expiration


Year of expiration	Tax loss carry-forwards		Tax value
2017		301		95
2018		34		8
2019		105		25
2020		259		83
2021		254		43
2022 or later		19,976		4,629

Total		20,929		4,883

In addition to the table above there are tax loss carry-forwards of SEK 3,936 (5,300) million at a tax value of SEK 950 (1,436) million that have not been recognized due to judgments of the possibility they will be used against future taxable profits in the respective jurisdictions. The majority of these tax loss carry-forwards have an expiration date in excess of five years.

C9 Earnings per share

Earnings per share


	2016		2015		2014
Basic
Net income attributable to stockholders of the Parent Company (SEK million)		1,716		13,549		11,568
Average number of shares outstanding, basic (millions)		3,263		3,249		3,237
Earnings per share, basic (SEK)		0.53		4.17		3.57

Diluted
Net income attributable to stockholders of the Parent Company (SEK million)		1,716		13,549		11,568
Average number of shares outstanding, basic (millions)		3,263		3,249		3,237
Dilutive effect for stock purchase plans (millions)		40		33		33
Average number of shares outstanding, diluted (millions)		3,303		3,282		3,270
Earnings per share, diluted (SEK)		0.52		4.13		3.54

C10 Intangible assets

Intangible assets 2016


	Capitalized development expenses								Goodwill		Intellectual property rights (IPR), trademarks and other intangible assets
											Trademarks,
			For internal use								customer		Patents
											relationships		and
	To be marketed		Acquired costs		Internal costs		Total		Total		and similar rights		acquired R&D		Total
Cost
Opening balance		15,307		2,213		1,697		19,217		41,105		24,284		31,611		55,895
Acquisitions/capitalization		4,333		—		150		4,483		—		4		11		15
Balances regarding acquired/divested businesses ¹⁾		—		—		—		—		585		175		2		177
Sales/disposals		–1,394		—		—		–1,394		—		–842		–28		–870
Reclassifications		—		—		—		—		–640		640		—		640
Translation difference		—		—		—		—		2,355		803		680		1,483

Closing balance		18,246		2,213		1,847		22,306		43,405		25,064		32,276		57,340
Accumulated amortization
Opening balance		–7,995		–2,158		–1,441		–11,594		—		–15,976		–25,272		–41,248
Amortization		–1,642		—		–173		–1,815		—		–1,418		–1,232		–2,650
Sales/disposals		1,394		—		—		1,394		—		812		28		840
Translation difference		—		—		—		—		—		–735		–469		–1,204

Closing balance		–8,243		–2,158		–1,614		–12,015		—		–17,317		–26,945		–44,262
Accumulated impairment losses
Opening balance		–2,038		–55		–37		–2,130		–18		—		–5,331		–5,331
Impairment losses		–85		—		—		–85		—		—		—		—

Closing balance		–2,123		–55		–37		–2,215		–18		—		–5,331		–5,331

Net carrying value		7,880		—		196		8,076		43,387		7,747		—		7,747

1)	For more information on acquired/divested businesses, see Note C26, “Business combinations.”

Ericsson Annual Report on Form 20-F 2016

Intangible assets 2015


	Capitalized development expenses								Goodwill		Intellectual property rights (IPR), trademarks and other intangible assets
			For internal use				Total		Total		Trademarks, customer relationships and similar rights		Patents and acquired R&D		Total
	To be marketed		Acquired costs		Internal costs		Total		Total		Trademarks, customer relationships and similar rights		Patents and acquired R&D		Total
Cost
Opening balance		12,204		2,213		1,478		15,895		38,348		23,362		31,005		54,367
Acquisitions/capitalization		3,329		—		219		3,548		—		70		—		70
Balances regarding acquired/divested businesses ¹⁾		—		—		—		—		1,165		261		184		445
Sales/disposals		—		—		—		—		—		–28		–55		–83
Reclassification		–226		—		—		–226		—		—		—		—
Translation difference		—		—		—		—		1,592		619		477		1,096

Closing balance		15,307		2,213		1,697		19,217		41,105		24,284		31,611		55,895
Accumulated amortization
Opening balance		–6,616		–2,158		–1,441		–10,215		—		–13,444		–23,058		–36,502
Amortization		–1,379		—		—		–1,379		—		–2,147		–1,992		–4,139
Sales/disposals		—		—		—		—		—		24		52		76
Translation difference		—		—		—		—		—		–409		–274		–683

Closing balance		–7,995		–2,158		–1,441		–11,594		—		–15,976		–25,272		–41,248
Accumulated impairment losses
Opening balance		–2,018		–55		–37		–2,110		–18		—		–5,331		–5,331
Impairment losses		–20		—		—		–20		—		—		—		—

Closing balance		–2,038		–55		–37		–2,130		–18		—		–5,331		–5,331

Net carrying value		5,274		—		219		5,493		41,087		8,308		1,008		9,316

1)	For more information on acquired/divested businesses, see Note C26, “Business combinations.”

The goodwill impairment testing is based on five-year business plans. The testing has been based on the new segments that became effective as per January 1, 2017 due to that the business plans where prepared for the new segments. In Note C3 “Operating segments” information about the new segments is disclosed.

The total goodwill for the Company is SEK 43.4 (41.1) billion and is allocated to the new operating segments Networks, at the sum of SEK 26.2 (n/a) billion, IT & Cloud, at the sum of SEK 9.8 (n/a) billion and Media, at the sum of SEK 7.4 (n/a) billion. The allocation of goodwill to the new segments has been done using a relative value approach, except for the goodwill related to one acquisition where the alternative approach has been used.

The recoverable amounts for cash-generating units are established as the present value of expected future cash flows. Estimation of future cash flows includes assumptions mainly for the following key financial parameters:

•

Sales growth

•

Development of operating income (based on operating margin or cost of goods sold and operating expenses relative to sales)

•

Development of working capital and capital expenditure requirements.

•

The assumptions regarding industry-specific market drivers and market growth are approved by Group management and each operating segment’s management. These assumptions are based on industry sources as input to the projections made within the Company for the development 2016–2021 for key industry parameters:

•

The number of global mobile subscriptions is estimated to grow from around 7.9 billion by the end of 2016 to around 9.9 billion by the end of 2021 (including Cellular M2M). Of these, around 7.9 billion will be mobile broadband subscriptions, taking mobile PC, tablets, routers and Cellular connected Internet of Things devices and handsets into account. Out of all phone subscriptions, 6.4 billion will be associated with a smartphone.

•

The overall number of connected things will grow to around 26 billion devices in 2021, including also M2M and connected consumer electronics.

•

Mobile data traffic volume is estimated to increase by around six times in the period 2016–2021. The mobile traffic is driven by smartphone users and video traffic. Smartphone traffic will grow by around seven times, and video traffic will grow around eight times in the period of 2016–2021.

The assumptions are also based upon information gathered in the Company’s long-term strategy process, including assessments of new technology, the Company’s competitive position and new types of business and customers, driven by the continued integration of telecom, data and media industries.

The impairment testing is based on specific estimates for the first five years and with a reduction of nominal annual growth rate to an average GDP growth of 1% (3%) per year thereafter. The impairment tests for goodwill did not result in any impairment. If impairment tests for goodwill had been based on the segment structure at the end of 2016, it would not have resulted in any impairment.

An after-tax discount rate of 8.0% (8.5%) has been applied for the discounting of projected after-tax cash flows. The same rate has been applied for all cash-generating units, since there is a high degree of integration between them. In addition, when a reasonably higher discount rate of 10.0% has been applied in the impairment tests, headroom for Networks and IT & Cloud is still positive.

For the Media segment the headroom is SEK 5.6 billion when a discount of 8.0% is applied. The recoverable amount is equal to its carrying amount when the discount factor is increased to 10.0%.

Group sales of media products and services declined in 2016 due to lower sales of legacy products. The transition to next-generation platform is ongoing with several customer trials. However, this has not yet translated into sales. Mobile video consumption is growing rapidly however there are significant M&A activities ongoing in the industry impacting purchasing behavior and the short- to mid-term addressable market growth.

The assumptions for 2015 are disclosed in Note C10, “Intangible assets” in the Annual Report of 2015.

The Company’s discounting is based on after-tax future cash flows and after-tax discount rates. This discounting is not materially different from a discounting based on before-tax future cash flows and before-tax discount rates, as required by IFRS. In Note C1, “Significant accounting policies,” and Note C2, “Critical accounting estimates and judgments,” further disclosures are given regarding goodwill impairment testing.

Ericsson Annual Report on Form 20-F 2016

C11 Property, plant and equipment

Property, plant and equipment 2016


	Real estate		Machinery and other technical assets		Other equipment, tools and installations		Construction in progress and advance payments		Total
Cost
Opening balance		6,475		4,560		28,753		4,750		44,538
Additions		177		148		1,519		4,285		6,129
Balances regarding acquired/divested businesses		–1		–53		2		—		–52
Sales/disposals		–1,410		–596		–2,610		–269		–4,885
Reclassifications		1,633		110		4,570		–6,315		–2
Translation difference		258		117		900		197		1,472

Closing balance		7,132		4,286		33,134		2,648		47,200
Accumulated depreciation
Opening balance		–3,634		–3,779		–21,208		—		–28,621
Depreciations		–506		–330		–3,585		—		–4,421
Balances regarding divested businesses		2		26		7		—		35
Sales/disposals		643		534		2,434		—		3,611
Reclassifications		4		1		–4		—		1
Translation difference		–138		–103		–705		—		–946

Closing balance		–3,629		–3,651		–23,061		—		–30,341
Accumulated impairment losses
Opening balance		—		–10		–6		—		–16
Impairment losses		–43		–1		–112		—		–156
Reversals of impairment losses		—		8		—		—		8
Sales/disposals		—		—		39		—		39
Translation difference		—		—		—		—		—

Closing balance		–43		–3		–79		—		–125

Net carrying value		3,460		632		9,994		2,648		16,734

Contractual commitments for the acquisition of property, plant and equipment as per December 31, 2016, amounted to SEK 476 (394) million.

Property, plant and equipment 2015


	Real estate		Machinery and other technical assets		Other equipment, tools and installations		Construction in progress and advance payments		Total
Cost
Opening balance		6,378		5,273		27,026		2,190		40,867
Additions		49		163		2,222		5,904		8,338
Balances regarding acquired/divested businesses		13		—		32		—		45
Sales/disposals		–773		–1,006		–2,412		–250		–4,441
Reclassifications		771		166		1,994		–2,931		—
Translation difference		37		–36		–109		–163		–271

Closing balance		6,475		4,560		28,753		4,750		44,538
Accumulated depreciation
Opening balance		–2,980		–4,074		–20,406		—		–27,460
Depreciations		–501		–441		–3,763		—		–4,705
Sales/disposals		151		909		2,403		—		3,463
Reclassifications		–323		–196		519		—		—
Translation difference		19		23		39		—		81

Closing balance		–3,634		–3,779		–21,208		—		–28,621
Accumulated impairment losses
Opening balance		–32		–20		–14		—		–66
Reversals of impairment losses		—		11		5		—		16
Sales/disposals		32		—		2		—		34
Translation difference		—		–1		1		—		—

Closing balance		—		–10		–6		—		–16

Net carrying value		2,841		771		7,539		4,750		15,901

Ericsson Annual Report on Form 20-F 2016

C12 Financial assets, non-current

Equity in joint ventures and associated companies


	2016		2015
Opening balance		1,210		2,793
Share in earnings		31		–38
Distribution of capital stock		—		–1,558
Taxes		–5		—
Reclassification		—		–36
Dividends		–84		–92
Divested business ¹⁾		–15		—
Translation difference		–362		141

Closing balance ²⁾		775		1,210

1)	For more information see Note C26, “Business combinations.”

2)	Goodwill, net, amounts to SEK 1 (15) million.

There were no major holdings in joint ventures or associated companies in 2016. Significant holdings from previous years are specified below.

All companies apply IFRS in the reporting to the Company as issued by IASB.

Ericsson’s share of assets, liabilities and income in associated company Rockstar Consortium


	2016			2015			2014
Percentage in ownership interest		21,26	%		21.26	%		21.26	%
Total assets		22			21			7,348
Total liabilities		—			5			196

Net assets (100%)		22			16			7,152
Company’s share of net assets (21.26%)		3			3			1,520
Net sales		—			—			—
Income after financial items		—			–642			–484

Net income and total comprehensive income (100%)		—			–642			–484
Company’s share of net income and other comprehensive income (21.26%)		—			–137			–103

Rockstar Consortium LLC (Rockstar) is a company that was formed in 2011 by Apple, Blackberry, Ericsson, Microsoft, and Sony to purchase approximately 4,000 patent assets out of the original about 6,000 from the Nortel bankruptcy estate. On December 23, 2014, it was agreed between the owners of Rockstar and RPX Corporation (RPXC) that RPX shall purchase the remaining patents of Rockstar. The transaction occured in 2015 and after that the main part of the capital stock has been distributed to the owners. Rockstar Consortium has concluded its operations.

Financial assets, non-current


	Other investments in shares and participations		Customer finance, non-current		Interest-bearing securities, non-current		Derivatives, non-current		Other financial assets, non-current
	2016	2015	2016	2015	2016	2015	2016	2015	2016	2015
Cost
Opening balance	2,567	2,115	1,755	2,011	—	—	452	551	5,365	5,621
Additions	133	234	2,704	2,324	7,593	—	—	—	785	1,882
Disposals/repayments/deductions	–267	–240	–2,333	–2,018	—	—	—	—	–187	–1,174
Change in value in funded pension plans ¹⁾	—	—	—	—	—	—	—	—	–1,622	–740
Revaluation	2	457	—	—	–7	—	—	–99	62	—
Reclassification	—	—	–12	–581	—	—	–452	—	—	—
Translation difference	81	1	23	19	—	—	—	—	245	–224

Closing balance	2,516	2,567	2,137	1,755	7,586	—	—	452	4,648	5,365
Accumulated impairment losses/allowances
Opening balance	–1,292	–1,524	–16	–79	—	—	—	—	–183	–272
Impairment losses/allowances	37	62	–5	–4	—	—	—	—	–1	74
Disposals/repayments/deductions	–1	217	12	67	—	—	—	—	–1	–7
Translation difference	–81	–47	—	—	—	—	—	—	–21	22

Closing balance	–1,337	–1,292	–9	–16	—	—	—	—	–206	–183

Net carrying value	1,179	1,275	2,128	1,739	7,586	—	—	452	4,442	5,182

1)	This amount includes asset ceiling. For further information, see Note C17, “Post-employment benefits.”

Ericsson Annual Report on Form 20-F 2016

C13 Inventories

Inventories


	2016		2015
Raw materials, components, consumables and manufacturing work in progress		5,043		6,807
Finished products and goods for resale		12,183		8,778
Contract work in progress		13,081		12,851

Inventories, net		30,307		28,436

The amount of inventories, excluding contract work in progress, recognized as expense and included in Cost of sales was SEK 63,386 (66,886) million.

Contract work in progress includes amounts related to delivery-type contracts and service contracts with ongoing work in progress.

Reported amounts are net of obsolescence allowances of SEK 2,412 (2,555) million.

Movements in obsolescence allowances


	2016		2015		2014
Opening balance		2,555		2,326		2,496
Additions, net		725		1,480		691
Utilization		–981		–1,295		–979
Translation difference		113		44		204
Balances regarding acquired/ divested businesses		—		—		–86

Closing balance		2,412		2,555		2,326

C14 Trade receivables and customer finance

Trade receivables and customer finance


	2016		2015
Trade receivables excluding associated companies and joint ventures		69,430		72,208
Allowances for impairment		–1,403		–1,202

Trade receivables, net		68,027		71,006
Trade receivables related to associated companies and joint ventures		90		63

Trade receivables, total		68,117		71,069
Customer finance credits		5,003		4,066
Allowances for impairment		–250		–286

Customer finance credits, net		4,753		3,780
Of which current		2,625		2,041
Credit commitments for customer finance		13,082		11,101

Days sales outstanding (DSO) were 95 (87) in December 2016.

Movements in allowances for impairment

Trade receivables

Customer finance

2016

2015

2016

2015

Opening balance

1,202

1,123

286

408

Additions

356

184

Utilized

–156

–59

–108

–47

Reversal of excess amounts

–28

–26

–8

–99

Reclassification

—

–2

—

Translation difference

–18

–3

Closing balance

1,403

1,202

250

286

Aging analysis as per December 31


	Total		Of which neither impaired nor past due		Of which impaired, not past due		Of which past due in the following time intervals:				Of which past due and impaired in the following time intervals:
	Total		Of which neither impaired nor past due		Of which impaired, not past due		less than 90 days		90 days or more		less than 90 days		90 days or more
2016
Trade receivables, excluding associated companies and joint ventures		69,430		58,198		62		4,406		5,423		10		1,331
Allowances for impairment		–1,403		—		–62		—		—		–10		–1,331
Customer finance credits		5,003		3,250		1,480		10		3		24		236
Allowances for impairment		–250		—		–64		—		—		–6		–180

2015
Trade receivables, excluding associated companies and joint ventures		72,208		64,485		82		3,150		3,371		74		1,046
Allowances for impairment		–1,202		—		–82		—		—		–74		–1,046
Customer finance credits		4,066		2,323		1,419		4		5		16		299
Allowances for impairment		–286		—		–24		—		—		–9		–253

Ericsson Annual Report on Form 20-F 2016

Credit risk

Credit risk is divided into three categories: credit risk in trade receivables, customer finance risk and financial credit risk, see Note C20, “Financial risk management and financial instruments.”

Credit risk in trade receivables

Credit risk in trade receivables is governed by a policy applicable to all legal entities in the Company. The purpose of the policy is to:

•

Avoid credit losses through establishing internal standard credit approval routines in all the Company’s legal entities

•

Ensure monitoring and risk mitigation of defaulting accounts, i.e. events of non-payment and/or delayed payments from customers

•

Ensure efficient credit management within the Company and thereby improve Days sales outstanding and Cash flow

•

Define escalation path and approval process for customer credit limits.

The credit worthiness of all customers is regularly assessed. Through credit management system functionality, credit checks are performed every time a sales order or an invoice is generated in the source system. These are based on the credit risk set on the customer. Credit blocks appear if past due receivables are higher than permitted levels. Release of a credit block requires authorization.

Letters of credits are used as a method for securing payments from customers operating in emerging markets, in particular in markets with unstable political and/or economic environments. By having banks confirming the letters of credit, the political and commercial credit risk exposures to the Company are mitigated.

Trade receivables amounted to SEK 69,430 (72,208) million as of December 31, 2016. Provisions for expected losses are regularly assessed and amounted to SEK 1,403 (1,202) million as of December 31, 2016. The Company’s nominal credit losses have, however, historically been low. The amounts of trade receivables closely follow the distribution of the Company’s sales and do not include any major concentrations of credit risk by customer or by geography. The five largest customers represented 27% (30%) of the total trade receivables in 2016.

Customer finance credit risk

All major commitments to finance customers are made only after approval by the Finance Committee of the Board of Directors, according to the established credit approval process.

Prior to the approval of new facilities reported as customer finance, an internal credit risk assessment is conducted in order to assess the credit rating of each transaction, for political and commercial risk. The credit risk analysis is made by using an assessment tool, where the political risk rating is identical to the rating used by all Export Credit Agencies within the OECD. The commercial risk is assessed by analyzing a large number of parameters, which may affect the level of the future commercial credit risk exposure. The output from the assessment tool for the credit rating also includes an internal pricing of the risk. This is expressed as a risk margin per annum over funding cost. The reference pricing for political and commercial risk, on which the tool is based, is reviewed using information from Export Credit Agencies and prevailing pricing in the bank loan market for structured financed deals. The objective is that the internally set risk margin shall reflect the assessed risk and that the pricing is as close as possible to the current market pricing. A reassessment of the credit rating for each customer finance facility is made on a regular basis.

Risk provisions related to customer finance risk exposures are only made upon events which occur after the financing arrangement has become effective and which are expected to have a significant adverse impact on the borrower’s ability and/or willingness to service the outstanding debt. These events can be political (normally outside the control of the borrower) or commercial, e.g. a borrower’s deteriorated creditworthiness.

As of December 31, 2016, the Company’s total outstanding exposure related to customer finance was SEK 5,003 (4,066) million. As of December 31, 2016, the Company also had unutilized customer finance commitments of SEK 13,082 (11,101) million. Customer finance is arranged for infrastructure projects in different geographic markets and for a large number of customers. As of December 31, 2016, there were a total of 81 (91) customer finance arrangements originated by or guaranteed by the Company. The five largest facilities represented 55% (50%) of the total credit exposure in 2016.

Total outstanding customer finance exposure per region as of December 31


Percent	2016		2015
North America		7		12
Latin America		7		16
Northern Europe & Central Asia		5		3
Western & Central Europe		2		5
Mediterranean		6		13
Middle East		31		29
Sub-Saharan Africa		25		12
India		3		1
North East Asia		—		—
South East Asia and Oceania		14		9

Total		100		100

The effect of risk provisions and reversals for customer finance affecting the income statement amounted to a net negative impact of SEK 24 million in 2016 compared to a net positive impact of SEK 33 million in 2015. Credit losses amounted to SEK 108 (47) million in 2016.

Security arrangements for customer finance facilities normally include pledges of equipment, pledges of certain assets belonging to the borrower and pledges of shares in the operating company. If available, third-party risk coverage is, as a rule, arranged. “Third-party risk coverage” means that a financial payment guarantee covering the credit risk has been issued by a bank, an export credit agency or other financial institution. A credit risk cover from a third-party may also be issued by an insurance company. A credit risk transfer under a sub-participation arrangement with a bank can also be arranged. In this case the entire credit risk and the funding is taken care of by the bank for the part that they cover.

Information about guarantees related to customer finance is included in Note C24, “Contingent liabilities,” and information about leasing is included in Note C27, “Leasing.” The table below summarizes the Company’s outstanding customer finance as of December 31, 2016 and 2015.

Outstanding customer finance


	2016		2015
Customer finance credits		5,003		4,066
Financial guarantees for third-parties		124		70
Accrued interest		16		26
Less third-party risk coverage		–805		–1,478

Ericsson’s risk exposure, including financial guarantees		4,338		2,684

Transfers of financial assets

Transfers where the Company has not derecognized the assets in their entirety

As of December 31, 2016, there existed no customer financing assets that the Company had transferred to third parties where the Company did not derecognize the assets in their entirety. However, it existed such transactions in 2015. The total carrying amount of the original assets transferred was in 2015 SEK 534 million; the amount of the assets that the Company continued to recognize in 2015 was SEK 27 million; and the carrying amount of the associated liabilities was SEK 0.

Transfers where the Company has continuing involvement

During 2016, the Company derecognized financial assets where it had continuing involvement. A repurchase of these assets would amount to SEK 630 (0) million. No assets or liabilities were recognized in relation to the continuing involvement.

Ericsson Annual Report on Form 20-F 2016

C15 Other current receivables

Other current receivables


	2016		2015
Prepaid expenses		4,501		4,883
Accrued revenues		1,584		1,604
Advance payments to suppliers		1,384		515
Derivatives with a positive value ¹⁾		1,108		950
Taxes		13,974		11,582
Other		1,880		2,175

Total		24,431		21,709

1)	See also Note C20, “Financial risk management and financial instruments.”

C16 Equity and other comprehensive Income

Capital stock 2016

Capital stock at December 31, 2016, consisted of the following:

Capital stock


Parent Company	Number of shares		Capital stock (SEK million)
Class A shares		261,755,983		1,309
Class B shares		3,069,395,752		15,348

Total		3,331,151,735		16,657

The capital stock of the Parent Company is divided into two classes: Class A shares (quota value SEK 5.00) and Class B shares (quota value SEK 5.00). Both classes have the same rights of participation in the net assets and earnings. Class A shares, however, are entitled to one vote per share while Class B shares are entitled to one tenth of one vote per share.

At December 31, 2016, the total number of treasury shares was 62,192,390 (49,367,641 in 2015 and 63,450,558 in 2014) Class B shares. Ericsson repurchased 26.1 million shares in 2016 in relation to the Stock Purchase Plan.

Reconciliation of number of shares


	Number of shares		Capital stock (SEK million)
Number of shares Jan 1, 2016		3,305,051,735		16,526
Number of shares Dec 31, 2016		3,331,151,735		16,657

For further information about the number of shares, see the chapter Share Information.

Dividend proposal

The Board of Directors will propose to the Annual General Meeting 2017 a dividend of SEK 1.00 per share (SEK 3.70 in 2016 and SEK 3.40 in 2015).

Additional paid in capital

This relates to payments made by owners and includes share premiums paid.

Retained earnings

Retained earnings, including net income for the year, comprise the earned profits of the Parent Company and its share of net income in subsidiaries, joint ventures and associated companies. Retained earnings also include:

Remeasurements related to post-employment benefits

Actuarial gains and losses resulting from experience-based events and changes in actuarial assumptions, fluctuations in the effect of the asset ceiling, and adjustments related to the Swedish special payroll taxes.

Revaluation of other investments in shares and participations

The fair value reserve comprises the cumulative net change in the fair value of available-for-sale financial assets.

Cash flow hedges

The cash flow hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash-flow-hedging instruments related to hedged transactions that have not yet occurred.

Cumulative translation adjustments

The cumulative translation adjustments comprise all foreign currency differences arising from the translation of the financial statements of foreign operations and changes regarding revaluation of excess value in local currency as well as from the translation of liabilities that hedge the Company’s net investment in foreign subsidiaries.

Ericsson Annual Report on Form 20-F 2016

C17 Post-employment benefits

Ericsson sponsors a number of post-employment benefit plans throughout the Company, which are in line with market practice in each country. The year 2016 was characterized by a decrease in discount rates in most plans. In total, discount rate changes resulted in actuarial losses on defined benefit obligations of SEK 9 billion. The development of plan assets was greater than expected resulting in actuarial gains of SEK 4 billion.

Swedish plans

Sweden has both defined benefit and defined contribution plans based on collective agreement between the parties in the Swedish labor market:

•

A defined benefit plan, known as ITP 2 (occupational pension for salaried employees in manufacturing industries and trade), complemented by a defined contribution plan, known as ITPK (supplementary retirement benefits). This is a final salary-based plan.

•

A defined contribution plan, known as ITP 1, for employees born in 1979 or later.

•

A defined contribution plan ITP 1 or alternative ITP, for employees earning more than 10 income base amount and who have opted out of the defined benefit plan ITP 2, where rules are set by the Company and approved by each employee selected to participate.

The Company has by far most of its Swedish pension liabilities under defined benefit plans which are funded to 55% (52%) through Ericsson Pensionsstiftelse (a Swedish Pension Foundation). The Pensionsstiftelse covers the liability up to the value of the defined benefit obligation based on Swedish GAAP calculations. There are no funding requirements for the Swedish plans. The disability and survivors’ pension part of the ITP-plan is secured through an insurance solution with the company Alecta, see section about Multi-employer plans.

The benefit payments are made by the Company since the liability is growing and the necessary surplus therefore is not yet reached. For the unfunded plans the Company meets the payment obligation when it falls due. The responsibility for governance of the plans and the plan assets lies with the Company and the Pensionsstiftelse. The Swedish Pensions-stiftelse is managed on the basis of a capital preservation strategy and the risk profile is set accordingly. Traditional asset-liability matching (ALM) studies are undertaken on a regular basis to allocate within different asset classes.

The plans are exposed to various risks, e.g., a sudden decrease in the bond yields, which would lead to an increase in the plan liability. A sudden instability in the financial market might also lead to a decrease in fair value of plan assets held by the Pensionsstiftelse, as the holdings of plan assets partly are exposed to equity markets; however, this may be partly offset by higher values in fixed income holdings. Swedish plans are linked to inflation and higher inflation will most likely lead to a higher liability. For the time being, inflation is a low risk factor to the Swedish plans as actual rate of inflation has not reached the ceiling target set by the Central Bank of Sweden.

Multi-employer plans

As before, the Company has secured the disability and survivors’ pension part of the ITP Plan through an insurance solution with the insurance company Alecta. Although this part of the plan is classified as a multi-employer defined benefit plan, it is not possible to get sufficient information to apply defined benefit accounting, as for most of the accrued pension benefits in Alecta, information is missing on the allocation of earnings process between employers. Full vesting is instead registered on the last employer. Alecta is not able to calculate a breakdown of assets and provisions for each respective employer, and therefore, the disability and survivors’ pension portion of the ITP Plan has been accounted for as a defined contribution plan.

Alecta has a collective funding ratio which acts as a buffer for its insurance commitments to protect against fluctuations in investment return and insurance risks. Alecta’s target ratio is 140% and reflects the fair value of Alecta’s plan assets as a percentage of plan commitments, then measured in accordance with Alecta’s actuarial assumptions, which are different from those in IAS 19R. Alecta’s collective funding ratio was 149% (153%) as of December 31, 2016. The Company’s share of Alecta’s saving premiums is 0.6%; the total share of active members in Alecta are 2.2%. The expected contribution to the plan is SEK 136 million for 2017.

Contingent liabilities / Assets pledged as collateral

Contingent liabilities include the Company’s mutual responsibility as a credit insured company of PRI Pensionsgaranti in Sweden. This mutual responsibility can only be imposed in the instance that PRI Pensions-garanti has consumed all of its assets, and it amounts to a maximum of 2% of the Company’s pension liability in Sweden. The Company has a pledged business mortgage of SEK 2 billion to PRI Pensionsgaranti.

US plans

The Company operates defined benefit pension plans in the US, which are a combination of final salary pension plans and contribution-based arrangements. The final salary pension plans provide benefits to members in the form of a guaranteed level of pension payable for life. The level of benefits provided depends on members’ length of service and their salary in the final years leading up to retirement. Retirees generally do not receive inflationary increases once in payment.

The other type of plan is a contribution-based pension plan, which provides a benefit determined using a “cash balance” approach. The balance is credited monthly with interest credits and contribution credits, based on a combination of current year salary and length of service.

The majority of benefit payments are from trustee-administered funds; however, there are also a number of unfunded plans where the Company meets the benefit payment obligation as it falls due. In the US, the Company’s policy is at least to meet or exceed the funding requirements of federal regulations. The funded level in the US Pension Plan is above the point at which minimum funding would be required for fiscal year 2016.

Plan assets held in trusts are governed by local regulations and practice, as is the nature of the relationship between the Company and the trustees (or equivalent) and their composition. Responsibility for governance of the plans – including investment decisions and contribution schedules – lies with the Plan Administrative Committee (PAC). The PAC is composed of representatives from the Company.

The Company’s plans are exposed to various risks associated with pension plans, i.e., a sudden decrease in bond yields would lead to an increase in the present value of the defined benefit obligation. A sudden instability in the financial markets might also lead to a decrease in the fair value of plan assets held by the trust. Pension benefits in the US are not linked to inflation; however, higher inflation poses the risk of increased final salaries being used to determine benefits for active employees. There is also a risk that the duration of payments to retirees will exceed the life expectancy in mortality tables.

Other plans

The Company also sponsors plans in other countries. The main plans are in Brazil, Ireland and the United Kingdom. The plan in Brazil is a pension plan wholly funded with a net surplus of assets. The plans in Ireland and the UK are final salary pension plans and are partly or wholly funded. The plans are managed by corporate trustees with directors appointed partly by the local company and partly by the plan members. The trustees are independent from the local company and subject to the specific country’s pension laws.

Ericsson Annual Report on Form 20-F 2016

Amount recognized in the Consolidated balance sheet


	Sweden		US		Other		Total
2016
Defined benefit obligation (DBO)		38,202		22,710		26,263		87,175
Fair value of plan assets		20,956		21,545		21,984		64,485

Deficit/surplus (+/–)		17,246		1,165		4,279		22,690
Plans with net surplus, excluding asset ceiling ¹⁾		—		—		1,033		1,033

Provision for post-employment benefits ²⁾		17,246		1,165		5,312		23,723
2015
Defined benefit obligation (DBO)		37,109		19,873		21,159		78,141
Fair value of plan assets		19,271		20,114		18,793		58,178

Deficit/surplus (+/–)		17,838		–241		2,366		19,963
Plans with net surplus, excluding asset ceiling ¹⁾		—		918		1,783		2,701

Provision for post-employment benefits ²⁾		17,838		677		4,149		22,664

1)	Plans with a net surplus, i.e., where plan assets exceed DBO, are reported as Other financial assets, non-current: see Note C12, “Financial assets.” The asset ceiling decreased during the year by SEK 46 million from SEK 530 million in 2015 to SEK 484 million in 2016.

2)	Plans with net liabilities are reported in the balance sheet as Post-employment benefits, non-current.

Total pension cost recognized in the Consolidated income statement

The costs for post-employment benefits within the Company are distributed between defined contribution plans and defined benefit plans, with a trend toward defined contribution plans.

Pension costs for defined contribution plans and defined benefit plans


	Sweden		US		Other		Total
2016
Pension cost for defined contribution plans		1,061		687		1,472		3,220
Pension cost for defined benefit plans		1,314		167		633		2,114

Total		2,375		854		2,105		5,334
Total pension cost expressed as a percentage of wages and salaries								8.9	%
2015
Pension cost for defined contribution plans		1,136		729		1,375		3,240
Pension cost for defined benefit plans		1,806		81		666		2,553

Total		2,942		810		2,041		5,793
Total pension cost expressed as a percentage of wages and salaries								9.5	%
2014
Pension cost for defined contribution plans		953		562		713		2,228
Pension cost for defined benefit plans		1,039		39		651		1,729

Total		1,992		601		1,364		3,957
Total pension cost expressed as a percentage of wages and salaries								6.8	%

Ericsson Annual Report on Form 20-F 2016

Change in the net defined benefit obligation


	Present value of obligation 2016 ²⁾		Fair value of plan assets 2016		Total 2016		Present value of obligation 2015 ²⁾		Fair value of plan assets 2015		Total 2015
Opening balance		78,141		–58,178		19,963		73,752		–56,862		16,890
Reclassification		104		–104		—		—		—		—
Included in the income statement
Current service cost		1,853		—		1,853		1,975		—		1,975
Past service cost and gains and losses on settlements		–182		—		–182		169		—		169
Interest cost/ income (+/–)		2,451		–2,176		275		2,446		–2,172		274
Taxes and administrative expenses		53		49		102		143		22		165
Other		–16		2		–14		–10		2		–8

		4,159		–2,125		2,034		4,723		–2,148		2,575
Remeasurements
Return on plan assets excluding amounts in interest expense/income		—		–4,280		–4,280		—		1,088		1,088
Actuarial gains/losses (–/+) arising from changes in demographic assumptions		–405		—		–405		1,768		—		1,768
Actuarial gains/losses (–/+) arising from changes in financial assumptions		8,255		—		8,255		135		—		135
Experience-based gains/losses (–/+)		–1,550		—		–1,550		–1,020		—		–1,020

		6,300		–4,280		2,020		883		1,088		1,971
Other changes
Translation difference		1,002		–834		168		1,167		–1,243		–76
Contributions and payments from:
Employers ¹⁾		–902		–562		–1,464		–764		–579		–1,343
Plan participants		28		–22		6		57		–38		19
Payments from plans:
Benefit payments		–1,568		1,568		—		–1,550		1,570		20
Settlements		—		—		—		–127		34		–93
Business combinations and divestments		–89		52		–37		—		—		—

Closing balance		87,175		–64,485		22,690		78,141		–58,178		19,963

1)	The expected contribution to the plans is SEK 1,286 million during 2017.

2)	The weighted average duration of DBO is 20.4 years.

Present value of the defined benefit obligation

Sweden

Other

Total

2016

DBO, closing balance

38,202

22,710

26,263

87,175

Of which partially or fully funded

37,679

21,956

23,449

83,084

Of which unfunded

523

754

2,814

4,091

2015

DBO, closing balance

37,109

19,873

21,159

78,141

Of which partially or fully funded

36,583

19,196

18,590

74,369

Of which unfunded

526

677

2,569

3,772

Ericsson Annual Report on Form 20-F 2016

Asset allocation by asset type and geography


	Sweden		US		Other		Total		Of which unquoted
2016
Cash and cash equivalents		1,819		414		793		3,026		14	%
Equity securities		3,983		692		4,195		8,870		19	%
Debt securities		8,791		18,286		13,898		40,975		70	%
Real estate		4,093		—		330		4,423		100	%
Investment funds		2,270		1,505		476		4,251		65	%
Assets held by insurance company		—		—		1,125		1,125		100	%
Other		—		648		1,167		1,815		69	%

Total		20,956		21,545		21,984		64,485
Of which real estate occupied by the Company		—		—		—		—
Of which securities issued by the Company		—		—		—		—

2015
Cash and cash equivalents		3,001		715		141		3,857		19	%
Equity securities		4,588		612		4,428		9,628		12	%
Debt securities		6,602		16,884		12,404		35,890		79	%
Real estate		2,654		—		155		2,809		100	%
Investment funds		2,426		1,354		233		4,013		71	%
Assets held by insurance company		—		—		629		629		100	%
Other		—		549		803		1,352		48	%

Total		19,271		20,114		18,793		58,178
Of which real estate occupied by the Company		—		—		—		—
Of which securities issued by the Company		—		—		—		—

Actuarial assumptions

Financial and demographic actuarial assumptions ¹⁾


	2016			2015
Financial assumptions
Discount rate, weighted average		2.8	%		3.3	%
Demographic assumptions
Life expectancy after age 65 in years, weighted average		23			23

1)	Weighted average for the Group for disclosure purposes only. Country-specific assumptions were used for each actuarial calculation.

Actuarial assumptions are assessed on a quarterly basis. See also Note C1 “Significant accounting policies” and Note C2 “Critical accounting estimates and judgments.”

Sweden

The defined benefit obligation has been calculated using a discount rate based on yields of Swedish government bonds. IAS 19 Employee Benefits prescribes that if there is not a deep market in high-quality corporate bonds the market yields on government bonds shall be applied for the pension liability calculation.

The defined benefit obligation has been calculated using a discount rate based on yields of high-quality corporate bonds, where “high-quality” has been defined as a rating of AA and above.

Total remeasurements in Other comprehensive income related to post-employment benefits


	2016		2015
Actuarial gains and losses (+/–)		–1,955		–1,507
The effect of asset ceiling		254		–55
Swedish special payroll taxes ¹⁾		–65		–464

Total		–1,766		–2,026

1)	Swedish payroll taxes are included in recognized gain/loss during the year in OCI.

Sensitivity analysis of significant actuarial assumptions


	2016		2015
Impact on DBO, SEK billion
Discount rate +0.5%		–9		–8
Discount rate –0.5%		+8		+7

Ericsson Annual Report on Form 20-F 2016

C18 Provisions

Provisions

Warranty

Restructuring

Other

Total

2016

Opening balance

528

1,466

1,844

3,838

Additions

267

5,271

808

6,346

Reversal of excess amounts

–207

–130

–352

–689

Negative effect on Income statement

5,657

Utilization/Cash out

–365

–2,440

–348

–3,153

Reclassifications

–18

–8

Translation difference

–5

Closing balance

248

4,163

1,946

6,357

2015

Opening balance

824

801

2,802

4,427

Additions

723

3,619

634

4,976

Reversal of excess amounts

–59

–189

–230

–478

Negative effect on Income statement

4,498

Utilization/Cash out

–984

–2,766

–1,312

–5,062

Reclassifications

—

Translation difference

–13

–50

–40

Closing balance

528

1,466

1,844

3,838

Provisions will fluctuate over time depending on business mix, market mix and technology shifts. Risk assessment in the ongoing business is performed monthly to identify the need for new additions and reversals. During certain years the Company undertakes restructuring activities that may require recognition of provisions. Management uses its best judgment to estimate provisions based on this assessment. Under certain circumstances, provisions are no longer required due to outcomes being more favorable than anticipated, which affect the provisions balance as a reversal. In other cases, the outcome can be negative, and if so, a charge is recorded in the income statement.

For 2016, new or additional provisions amounting to SEK 6.3 billion were made, and SEK 0.7 billion of provisions were reversed. The actual cash outlays for 2016 were SEK 3.2 billion compared with the estimated SEK 2.5 billion. The total cash out for 2016 was made up of warranty provisions of SEK 0.4 billion, restructuring provisions of SEK 2.4 billion and other provisions of SEK 0.3 billion. The expected total cash outlays in 2017 are approximately SEK 4.4 billion.

Of the total provisions, SEK 946 (176) million is classified as non-current. For more information, see Note C1, “Significant accounting policies” and Note C2, “Critical accounting estimates and judgments.”

Warranty provisions

Warranty provisions are based on historic quality rates for established products as well as estimates regarding quality rates for new products and costs to remedy the various types of faults predicted. Provisions amounting to SEK 0.3 billion were made and due to more favorable outcomes in certain cases reversals of SEK 0.2 billion were made.

The actual cash outlays for 2016 were SEK 0.4 billion, in line with the expected SEK 0.4 billion. The cash outlays of warranty provisions during year 2017 are estimated to total approximately SEK 0.1 billion.

Restructuring provisions

In 2016, SEK 5.3 billion in provisions were made and SEK 0.1 billion were reversed due to a more favorable outcome than expected. Provisions were mainly related to the cost and efficiency program initially announced in November 2014. The scope of the structural efficiency measures involves service delivery, supply and manufacturing, R&D and SG&A (Selling, General and Administrative expenses). The cash outlays for restructuring provisions were SEK 2.4 billion for the full-year, compared with the expected SEK 1.2 billion. The cash outlays for 2017 for these provisions are estimated to total approximately SEK 3.2 billion.

Other provisions

Other provisions include provisions for probable contractual penalties, tax issues, litigations, supplier claims, and other. During 2016, new provisions amounting to SEK 0.8 billion were made and SEK 0.4 billion were reversed due to a more favorable outcome. The cash outlays were SEK 0.3 billion in 2016 compared to the estimate of SEK 0.8 billion. For 2017, the cash outlays for other provisions are estimated to total approximately SEK 1.1 billion.

Ericsson Annual Report on Form 20-F 2016

C19 Interest-bearing liabilities

As of December 31, 2016, the Company’s outstanding interest-bearing liabilities was SEK 26.7 (25.1) billion.

Interest-bearing liabilities


	2016		2015
Borrowings, current
Current part of non-current borrowings ¹⁾		4,954		435
Other current borrowings		3,079		1,941

Total current borrowings		8,033		2,376
Borrowings, non-current
Notes and bond loans		10,556		14,699
Other borrowings, non-current		8,097		8,045

Total non-current interest-bearing liabilities		18,653		22,744

Total interest-bearing liabilities		26,686		25,120

1)	Including notes and bond loans of SEK 4,900 (0) million.

To secure long-term funding, the Company uses notes and bond programs together with bilateral research and development loans. All outstanding notes and bond loans are issued by the Parent Company under its Euro Medium-Term Note (EMTN) program or under its U.S. Securities and Exchange Commission (SEC) Registered program. Bonds issued at a fixed interest rate are normally swapped to a floating interest rate using interest rate swaps leaving a maximum of 50% of outstanding loans at fixed interest rates. Total weighted average interest rate cost for the long-term funding during the year was 2.76% (2.58%). The outstanding EUR bond is revalued based on changes in benchmark interest rates according to the fair value hedge methodology stipulated in IAS 39.

In June 2016, the Company exercised its first extension option under the USD 2 billion multi-currency revolving credit facility, extending the maturity date to June 2021. One extension option of one year remains.

In November 2016, the Company signed a new EUR 0.5 billion term loan facility. The new facility has a tenor of two years with one extension option of one year and the facility serves for general corporate purposes.

Notes, bonds, bilateral loans and committed credit

Issued–maturing

Nominal
amount

Coupon

Currency

Book value
(SEK million) ⁹⁾

Maturity date

Unrealized hedge
gain/loss (included
in book value)

Notes and bond loans

2007–2017

500

5.375

EUR

4,900

¹⁾

June 27, 2017

–120

2010–2020 ²⁾

170

USD

1,540

December 23, 2020

2012–2022

1,000

4.125

USD

9,016

⁸⁾

May 15, 2022

Total notes and bond loans

15,456

–120

Bilateral loans

2012–2019 ³⁾

USD

887

September 30, 2019

2012–2021 ⁴⁾

USD

889

September 30, 2021

2013–2020 ⁵⁾

684

USD

6,193

November 6, 2020

Total bilateral loans

7,969

Committed credit

Long-term committed credit facility ⁶⁾

2,000

USD

—

June 5, 2021

Term loan facility ⁷⁾

500

EUR

—

November 10, 2018

Total committed credit

—

1)	Interest rate swaps are designated as fair value hedges.

2)	Private Placement, Swedish Export Credit Corporation (SEK).

3)	Nordic Investment Bank (NIB), R&D project financing.

4)	Nordic Investment Bank (NIB), R&D project financing.

5)	European Investment Bank (EIB), R&D project financing.

6)	Multi-currency revolving credit facility. Unutilized. One one-year extension option remains.

7)	Bridge term loan facility. Unutilized. One one-year extension option remains.

8)	Market value SEK 9,092 million.

9)	Market value is approximately equal to book value except where indicated.

Ericsson Annual Report on Form 20-F 2016

C20 Financial risk management and financial instruments

The Company’s financial risk management is governed by a policy approved by the Board of Directors. The Finance Committee of the Board of Directors is responsible for overseeing the capital structure and financial management of the Company and approving certain matters (such as investments, customer finance commitments, guarantees and borrowing) and continuously monitors the exposure to financial risks.

The Company defines its managed capital as the total Company equity. For the Company, a robust financial position with a strong equity ratio, solid investment grade rating, low leverage and ample liquidity is deemed important. This provides financial flexibility and independence to operate and manage variations in working capital needs as well as to capitalize on business opportunities.

The Company’s overall capital structure should support the financial targets: to grow faster than the market, deliver best-in-class margins and generate a healthy cash flow. The capital structure is managed by balancing equity, debt financing and liquidity in such a way that the Company can secure funding of operations at a reasonable cost of capital. Regular borrowings are complemented with committed credit facilities to give additional flexibility to manage unforeseen funding needs. The Company strives to finance growth, normal capital expenditures and dividends to shareholders by generating cash flows from operating activities.

The Company’s capital objectives are:

•

To maintain an equity ratio above 40%

•

A cash conversion rate above 70%

•

To maintain a positive net cash position larger than the pension liability

•

To maintain a solid investment grade rating by Moody’s and Standard & Poor’s.

Capital objectives-related information, SEK billion


	2016			2015
Capital		140			147
Equity ratio		50	%		52	%
Cash conversion		175	%		85	%
Positive net cash		31.2			41.2

Credit rating
Moody’s		Baa3, negative			Baa1, stable
Standard & Poor’s		BBB, negative			BBB+, stable

The definition of Net cash has been adjusted in order to more clearly represent Ericsson’s ability to meet financial obligations. Post-employment benefits are no longer included in the calculation of Net cash. Interest-bearing securities, non-current are now included in Net cash because these are liquid instruments with low credit risk. The revised definition is as follows:

Net cash: Cash and cash equivalents plus interest-bearing securities (current and non-current) less interest-bearing liabilities (which include: non-current borrowings and current borrowings).

In October 2016, Moody’s announced that they have downgraded the senior unsecured debt ratings to Baa2 from Baa1 and the MTN program rating to Baa2 from Baa1. At the same time, the agency placed the company’s Baa2/Baa2 ratings on review for further downgrade. In December 2016, Moody’s concluded their review and announced that they have downgraded the senior unsecured debt ratings to Baa3 from Baa2 and the MTN program rating to Baa3 from Baa2, with a negative outlook. In October 2016, S&P announced that they have downgraded the long-term corporate credit rating on Ericsson to BBB from BBB+, with a negative outlook.

The Company has a treasury function with the principal role to ensure that appropriate financing is in place through loans and committed credit facilities, actively managing the Company’s liquidity as well as financial assets and liabilities, and managing and controlling financial risk exposures in a manner consistent with underlying business risks and financial policies.

Hedging activities, cash management and insurance management are largely centralized to the treasury function in Stockholm.

The Company also has a customer finance function with the main objective to find suitable third-party financing solutions for customers and to minimize recourse to the Company. To the extent that customer loans are not provided directly by banks, the Parent Company provides or guarantees vendor credits. The customer finance function monitors the exposure from outstanding vendor credits and credit commitments.

The Company classifies financial risks as:

•

Foreign exchange risk

•

Interest rate risk

•

Credit risk

•

Liquidity and refinancing risk

•

Market price risk in own and other equity instruments.

The Board of Directors has established risk limits for defined exposures to foreign exchange and interest rate risks as well as to political risks in certain countries.

For further information about accounting policies, see Note C1, “Significant accounting policies.”

Foreign exchange risk

The Company is a global company with sales mainly outside Sweden. Sales and incurred costs are to a large extent denominated in currencies other than SEK and therefore the financial results of the Company are impacted by currency fluctuations.

The Company reports the financial statements in SEK. Movements in exchange rates between currencies that affect these statements are impacting the comparability between periods.

Line items, primarily sales, are impacted by translation exposure incurred when converting foreign entities’ financial statements into SEK. Line items and profitability, such as operating income are impacted by transaction exposure incurred when financial assets and liabilities, primarily trade receivables and trade payables, are initially recognized and subsequently remeasured due to change in foreign exchange rates. The table below presents the net exposure for the largest currencies impact on sales and also net transaction exposure of these currencies on profitability.

Currency exposure, SEK billion


Exposure currency	Sales translation exposure		Sales transaction exposure		Sales net exposure		Incurred cost transaction exposure ¹⁾		Net transaction exposure
USD		55.2		45.8		101.0		–17.4		28.4
EUR		26.5		13.1		39.6		–7.4		5.7
CNY		15.8		–0.3		15.5		–5.1		–5.4
INR		10.5		0.0		10.5		–1.3		–1.3
JPY		7.0		0.0		7.0		4.5		4.5
AUD		5.9		–0.1		5.8		2.1		2.0
GBP		7.1		–1.7		5.4		0.9		–0.8
SAR		4.3		0.3		4.6		2.8		3.1
BRL		4.3		0.0		4.3		0.6		0.6

1)	Transactions in foreign currency – internal sales, internal purchases, external purchases.

Translation exposure

Translation exposure relates to sales and cost incurred in foreign entities when converted into SEK upon consolidation. These exposures cannot be addressed by hedging, but as the income statement is translated using average rate, the impact of volatility in foreign currency rates is reduced.

Transaction exposure

Transaction exposure relates to sales and cost incurred in non-reporting currencies in individual group companies. Foreign exchange risk is as far as possible concentrated in Swedish group companies, primarily Ericsson

Ericsson Annual Report on Form 20-F 2016

AB. Sales to foreign subsidiaries are normally denominated in the functional currency of the customers, and so tend to be denominated in USD or another foreign currency. In order to limit the exposure toward exchange rate fluctuations on future revenues and costs, committed and forecasted future sales and purchases in major currencies are hedged with 7% of 12-month forecast monthly. By this, the Company will have hedged 84% of the next month and 7% of the 12th month of an average forecast of the individual month at any given reporting date. This corresponds to approximately 5–6 months of an average forecast.

Outstanding derivatives contracts that are hedging future sales and costs incurred are revalued against “Other operating income and expense.” The sensitivity in “Other operating income and expense” in relation to this revaluation is dependent on changes in foreign exchange rates, forecasts, seasonality and hedging policy. USD is the Company’s largest exposure and at year-end a change by 0.25 SEK/USD would impact profit and loss with approximately SEK 0.3 billion. Revaluation results of these derivative contracts amounted to SEK –0.4 billion in 2016. According to Company policy, transaction exposure in subsidiaries’ balance sheets (i.e., trade receivables and payables and customer finance receivables) should be fully hedged, except for non-tradable currencies.

Foreign exchange exposures in balance sheet items are hedged through offsetting balances or derivatives.

Interest rate risk

The Company is exposed to interest rate risk through market value fluctuations in certain balance sheet items and through changes in interest revenues and expenses. The net cash position was SEK 31.2 (41.2) billion at the end of 2016, consisting of cash, cash equivalents and interest-bearing securities of SEK 57.9 (66.3) billion, interest-bearing liabilities of SEK 26.7 (25.1) .

The Company manages the interest rate risk by i) matching fixed and floating interest rates in interest-bearing balance sheet items and ii) avoiding significant fixed interest rate exposure in the Company’s net cash position. The policy is that interest-bearing assets shall have an average interest duration of between 6 and 14 months, taking derivative instruments into consideration. Interest-bearing liabilities do not have a firm target for the duration, nor a firm target for fixed/floating interest rate, as duration and interest mix are decided based on market conditions when the liabilities are issued. The treasury function has a mandate to deviate from the asset management benchmark given by the Board and take foreign exchange positions up to an aggregated risk of VaR SEK 45 million given a confidence level of 99% and a 1-day horizon.

Interest duration, SEK billion

< 3M

3–12M

1–3Y

3–5Y

>5Y

Total

Interest-bearing trading

1.4

–1.4

0.0

Interest-bearing assets

30.5

–4.6

24.2

11.7

–3.9

57.9

Interest-bearing liabilities

29.4

–18.0

–17.4

–11.4

–9.3

–26.7

When managing the interest rate exposure, the Company uses derivative instruments, such as interest rate swaps. Derivative instruments used for converting fixed rate debt into floating rate debt are designated as fair value hedges.

Outstanding derivatives

Outstanding derivatives ¹⁾


	2016					2015
Fair value	Asset			Liability		Asset			Liability
Currency derivatives
Maturity within 3 months		351			193		316			137
Maturity between 3 and 12 months		262			137		224			41

Total		613			330		540			178
Interest rate derivatives
Maturity within 3 months		—			—		5			—
Maturity between 3 and 12 months		239			82		165			234
Maturity between 1 and 3 years		191			205		545			243
Maturity between 3 and 5 years		—			6		53			176
Maturity of more than 5 years		65			116		94			108

Total		495	²⁾		409		862	²⁾		761
Of which designated in fair value hedge relations		120			—		338			—

1)	Some of the derivatives hedging non-current liabilities are recognized in the balance sheet as non-current derivatives due to hedge accounting.

2)	Of which SEK 0 (452) million is reported as non-current assets.

Sensitivity analysis

The Company uses the VaR methodology to measure foreign exchange and interest rate risks in portfolios managed by the treasury function. This statistical method expresses the maximum potential loss that can arise with a certain degree of probability during a certain period of time. For the VaR measurement, the Company has chosen a probability level of 99% and a 1-day time horizon. The daily VaR measurement uses market volatilities and correlations based on historical daily data (one year).

The average VaR calculated for 2016 was SEK 16.3 (11.7) million for the combined mandates. No VaR-limits were exceeded during 2016.

Financial credit risk

Financial instruments carry an element of risk in that counterparts may be unable to fulfill their payment obligations. This exposure arises in the investments in cash, cash equivalents, interest-bearing securities and from derivative positions with positive unrealized results against banks and other counterparties.

The Company mitigates these risks by investing cash primarily in well-rated securities such as treasury bills, government bonds, commercial papers, and mortgage-covered bonds with short-term ratings of at least A-2/P-2 or equivalents, and long-term ratings of AAA. Separate credit limits are assigned to each counterpart in order to minimize risk concentration. All derivative transactions are covered by ISDA netting agreements to reduce the credit risk.

At December 31, 2016, the credit risk in financial cash instruments was equal to the instruments’ carrying value. Credit exposure in derivative instruments was SEK 1.1 (1.4) billion.

Liquidity risk

The Company minimizes the liquidity risk by maintaining a sufficient cash position, centralized cash management, investments in highly liquid interest-bearing securities, and by having sufficient committed credit lines in place to meet potential funding needs. For information about contractual obligations, see Note C31, “Contractual obligations.” The current cash position is deemed to satisfy all short-term liquidity requirements as well as non-current borrowings.

Ericsson Annual Report on Form 20-F 2016

Cash, cash equivalents and interest-bearing securities


	Remaining time to maturity
SEK billion	< 3 months		3–12 months		1–5 years		>5 years		Total
Banks		29.0		0.1		0.2		0.0		29.3
Type of issuer/counterpart
Governments		0.0		0.5		7.1		0.3		7.9
Corporates		8.0		0.0		0.0		0.0		8.0
Mortgage institutes		0.0		0.7		12.0		0.0		12.7
2016		37.0		1.3		19.3		0.3		57.9
2015		40.3		3.0		22.4		0.6		66.3

The instruments are classified as held for trading, loans and receivables, or available-for-sale. Cash, cash equivalents and interest-bearing securities are mainly held in SEK unless offset by EUR-funding. Instruments held for trading with a remaining maturity longer than one year amounted to SEK 12.0 billion and were reported as Interest-bearing securities, current.

Refinancing risk

Refinancing risk is the risk that the Company is unable to refinance outstanding debt under reasonable terms and conditions, or at all, at a given point in time.

Debt financing is mainly carried out through borrowing in the Swedish and international debt capital markets.

Bank financing is used for certain subsidiary funding and to obtain committed credit facilities, see Note C19, “Interest-bearing liabilities.”

Funding programs ¹⁾


	Amount			Utilized		Unutilized
Euro Medium-Term Note program (USD million)		5,000			698		4,288
SEC Registered program (USD million)		²	⁾		1,000		—

1)	There are no financial covenants related to these programs.

2)	Program amount indeterminate.

Fair valuation of the Company’s financial instruments

The Company’s financial instruments accounted for at fair value generally meet the requirements of level 1 valuation due to the fact that they are based on quoted prices in active markets for identical assets.

Exceptions to this relates to:

•

OTC derivatives with an amount of gross SEK 1.2 (1.8) billion in relation to assets and gross SEK 0.9 (1.3) billion in relation to liabilities were valued based on references to other market data as currency or interest rates. These valuations fall under level 2 valuation as defined by IFRS.

•

Ownership in other companies and other financial investments where the Company neither has control nor significant influence. The amount recognized in these cases was SEK 2.1 (2.1) billion. These assets, classified as level 3 assets for valuation purposes, have been valued based on value in use technique.

Financial instruments carried at other than fair value

The fair value of the Company’s financial instruments, recognized at fair value, is determined based on quoted market prices or rates. For further information about valuation principles, see Note C1, “Significant accounting policies.”

Financial instruments, such as trade receivables, borrowings and payables, are carried at amortized cost which is deemed to be equal to fair value, except for those noted in the table Notes, bonds, bilateral loans and committed credits in Note C19, “Interest-bearing liabilities.” When a market price is not readily available and there is insignificant interest rate exposure and credit spreads affecting the value, the carrying value is considered to represent a reasonable estimate of fair value.

Market price risk in own shares and other listed equity investments

The Company is exposed to fluctuations in its own share price through stock purchase plans for employees and synthetic share-based compensations to the Board of Directors.

Stock purchase plans for employees

The obligation to deliver shares under the stock purchase plan is covered by holding Ericsson Class B shares as treasury stock. A change in the share price will result in a change in social security charges, which represents a risk to the income statement. The cash flow exposure is fully hedged through the holding of Ericsson Class B shares as treasury stock to be sold to generate funds, which also cover social security payments.

Synthetic share-based compensations to the Board of Directors

In the case of these plans, the Company is exposed to risks in relation to own share price, both with regards to compensation expenses and social security charges. The obligation to pay compensation amounts under the synthetic share-based compensations to the Board of Directors is covered by a liability in the balance sheet.

For further information about the stock purchase plan and synthetic share-based compensations to the Board of Directors, see Note C28, “Information regarding members of the Board of Directors, the Group management and employees.”

Offsetting financial assets and liabilities

As required by IFRS, the Company has off set financial instruments under ISDA agreements. The related assets amounted to SEK 1.2 (1.8) billion, prior to offsetting of SEK 0.1 (0.4) billion, with a net amount of SEK 1.1 (1.4) billion recognized in the balance sheet. The related liabilities amounted to SEK 0.9 (1.3) billion, prior to offsetting of SEK 0.1 (0.4) billion, with a net amount of SEK 0.8 (0.9) billion recognized in the balance sheet.

Financial instruments, book value

SEK billion

Customer
finance

Trade
receivables

Interest-
bearing
securities

Cash
equiva-
lents

Borrowings

Trade
payables

Other
financial
assets

Other
current
receiv-
ables

Other
current
liabilities

2016

2015

Note

C14

C12

C25

C19

C22

C12

C15

C21

Assets at fair value through profit or loss

13.3

8.9

0.9

1.1

–0.7

23.5

40.2

Loans and receivables

4.8

68.1

2.5

3.5

78.9

84.2

Available-for-sale

7.6

1.2

8.8

1.3

Financial liabilities at amortized cost

–26.7

–25.3

–52.0

–47.5

Total

4.8

68.1

20.9

11.4

–26.7

–25.3

5.6

1.1

–0.7

59.2

78.2

Ericsson Annual Report on Form 20-F 2016

C21 Other current liabilities

Other current liabilities


	2016		2015
Income tax liabilities		—		3,924
Advances from customers		5,391		5,038
Accrued interest		367		475
Accrued expenses		30,716		32,629
Of which employee-related		9,414		13,229
Of which supplier-related		13,003		12,119
Of which other ¹⁾		8,299		7,281
Deferred revenues		13,990		11,229
Derivatives with a negative value ²⁾		739		939
Other ³⁾		4,800		4,429

Total		56,003		58,663

1)	Major balance relates to accrued expenses for customer projects.

2)	See Note C20, “Financial risk management and financial instruments.”

3)	Includes items such as VAT and withholding tax payables and other payroll deductions, and liabilities for goods received where the related invoice has not yet been received.

C22 Trade payables

Trade payables


	2016		2015
Trade payables to associated companies and joint ventures		296		329
Trade payables, excluding associated companies and joint ventures		25,022		22,060

Total		25,318		22,389

C23 Assets pledged as collateral

Assets pledged as collateral


	2016		2015
Chattel mortgages ¹⁾		2,240		2,231
Bank deposits		344		295

Total		2,584		2,526

1)	See also Note C17, “Post-Employment benefits.”

C24 Contingent liabilities

Contingent liabilities


	2016		2015
Contingent liabilities		1,186		922

Total		1,186		922

Contingent liabilities assumed by Ericsson include guarantees of loans to other companies of SEK 24 (23) million. Ericsson has SEK 33 (32) million issued to guarantee the performance of a third-party.

All ongoing legal and tax proceedings have been evaluated, their potential economic outflows and probability estimated and necessary provisions made. In Note C2, “Critical Accounting Estimates and Judgments.” further disclosure is presented in relation to (i) key sources of estimation uncertainty and (ii) the decision made in relation to accounting policies applied.

Financial guarantees for third-parties amounted to SEK 124 (70) million as of December 31, 2016. The maturity date for the majority of the issued guarantees occurs in 2020 at the latest.

C25 Statement of cash flows

Interest paid in 2016 was SEK –1,269 million (SEK 926 million in 2015 and SEK 1,120 million in 2014) and interest received in 2016 was SEK 110 million (SEK 550 million in 2015 and SEK 1,369 million in 2014). Taxes paid, including withholding tax, were SEK 9,105 million in 2016 (SEK 7,705 million in 2015 and SEK 6,114 million in 2014).

Cash and cash equivalents include cash of SEK 25,577 (22,431) million and temporary investments of SEK 11,389 (17,793) million. For more information regarding the disposition of cash and cash equivalents and unutilized credit commitments, see Note C20, “Financial risk management and financial instruments.”

Cash and cash equivalents as of December 31, 2016, include SEK 4.2 billion (4.7) in countries where there exist significant cross-border conversion restrictions due to hard currency shortage or strict government controls. This amount is therefore not considered available for general use by the Parent Company.

Ericsson Annual Report on Form 20-F 2016

Adjustments to reconcile net income to cash

2016

2015

2014

Property, plant and equipment

Depreciation

4,421

4,705

4,329

Impairment losses/reversals of impairments

148

–16

–13

Total

4,569

4,689

4,316

Intangible assets

Amortization

Capitalized development expenses

1,815

1,379

1,270

Intellectual Property Rights, brands and other intangible assets

2,650

4,139

4,328

Total amortization

4,465

5,518

5,598

Impairments

Capitalized development expenses

Intellectual Property Rights, brands and other intangible assets

—

Total

4,550

5,538

5,629

Total depreciation, amortization and impairment losses on property, plant and equipment and intangible assets

9,119

10,227

9,945

Taxes

–6,200

–2,835

–1,235

Dividends from joint ventures/associated companies ¹⁾

249

Undistributed earnings in joint ventures/associated companies ¹⁾

–26

Gains/losses on sales of investments and operations, intangible assets and PP&E, net ²⁾

–37

–156

128

Other non-cash items ³⁾

3,172

3,245

2,057

Total adjustments to reconcile net income to cash

6,112

10,611

11,200

1)	See Note C12, “Financial assets, non-current.”

2)	See Note C6, “Other operating income and expense.”

3)	Refers mainly to unrealized foreign exchange, gains/losses on financial instruments.

Acquisitions/divestments of subsidiaries and other operations


	Acquisitions		Divestments
2016
Cash flow from business combinations ¹⁾		–781		25
Acquisitions/divestments of other investments		–203		337

Total		–984		362
2015
Cash flow from business combinations ¹⁾		–1,867		—
Acquisitions/divestments of other investments		–334		1

Total		–2,201		1
2014
Cash flow from business combinations ¹⁾		–4,410		42
Acquisitions/divestments of other investments		–32		6

Total		–4,442		48

1)	See also Note C26, “Business combinations.”

C26 Business combinations

Acquisitions and divestments

Acquisitions

Acquisitions 2014–2016

2016

2015

2014

Total consideration, including cash

920

2,119

4,767

Acquisition-related costs ¹⁾

Net assets acquired

Cash and cash equivalents

139

271

407

Property, plant and equipment

427

Intangible assets

817

445

2,540

Other assets

290

572

817

Provisions, including post-employment benefits

—

–288

Other liabilities

–290

–379

–1,150

Total identifiable net assets

975

954

2,753

Goodwill

–55

²⁾

1,165

2,014

Total

920

2,119

4,767

1)	Acquisition-related costs are included in Selling and administrative expenses in the consolidated income statement.

2)	Of which SEK 585 million was acquired goodwill and SEK –640 million refers to a reclassification when the preliminary purchase price allocations made in 2015 were finalized 2016.

In 2016, Ericsson made acquisitions with a negative cash flow effect amounting to SEK 781 (1,867) million. The acquisitions presented below are not material but the Company gives the information to provide the reader a summarized view of the content of the acquisitions made. The acquisitions consist primarily of:

•

FYI Television: On January 25, 2016, the Company acquired 100% of the shares in FYI Television, a US based premier entertainment metadata and rich media content supplier based in Grand Prairie, Texas, with approximately 150 employees. The acquisition makes it possible to combine FYI Television’s US-market expertise and reach with Ericsson’s experience in content discovery in Europe, which is a key component of Ericsson’s TV and Media strategy to improve the video experience in a multiscreen world. Balances to facilitate the Purchase price allocation are final.

•

Ericpol: On April 13, 2016, the Company acquired 100% of the shares in Ericpol a software development company in Poland within telecommunications who has been a supplier to Ericsson for over 20 years. Approximately 2,000 employees joined the Company. With the acquisition of Ericpol’s operations in Poland and Ukraine, the Company secures well integrated software development competence within radio, cloud and IP to enable business continuity. Balances to facilitate the Purchase price allocation are preliminary.

•

Nodeprime: On April 15, 2016, the Company acquired 100% of the shares in Nodeprime a US based company, with an infrastructure management platform, designed to support the command and control of the complete ecosystem of components in today’s existing datacenters. Integrated into the Ericsson Hyperscale Datacenter System 8000, this software platform enables discovery, analysis and automated configuration of existing and new datacenter hardware platforms. This allows datacenters to become hyperscale and adopt distributed infrastructure. By acquiring Nodeprime’s competence, the Company aims to reduce sourcing risk and to secure control of roadmap direction and acceleration. Balances to facilitate the Purchase price allocation are final.

Ericsson Annual Report on Form 20-F 2016

The preliminary purchase price allocations made in 2015 were finalized during 2016 with the following effects: An increase in intangible assets of SEK 585 million and a decrease in goodwill of SEK 640 million.

In order to finalize a purchase price allocation all relevant information needs to be in place. Examples of such information are final consideration and final opening balances, which may remain preliminary for a period of time due to for example adjustments of working capital, tax items or decisions from local authorities.

Divestments

Divestments 2014–2016


	2016		2015		2014
Proceeds		25		0		42
Net assets disposed of
Property, plant and equipment		36		—		—
Investments in joint ventures and associated companies		15		—		32
Other assets		5		52		46
Other liabilities		–114		–3		—

		–58		49		78
Net gains/losses from divestments		83		–49		–36
Less Cash and cash equivalents		—		—		—

Cash flow effect		25		0		42

In 2016, the Company made some minor divestments with a cash flow effect amounting to SEK 25 (0) million.

Acquisitions 2014–2016


Company	Description	Transaction date

Nodeprime	A US based software development company with an infrastructure management platform.	Apr 2016

Ericpol	A software development company in Poland within telecommunications.	Apr 2016

FYI Television	A US based premier entertainment metadata and rich media content supplier.	Jan 2016

Envivio	A US-based company with competence in software-defined and cloud-enabled architectures for video processing.	Oct 2015

ICON	A consulting and systems integration business with approximately 250 employees and consultants.	Aug 2015

Sunrise technology	A business which has a strong track record of delivering complex IT solutions to leading operators in China.	Jul 2015

Timelessmind	A Canada-based consulting and systems integration business specializing in operations and business support (OSS and/BSS).	Apr 2015

Apcera	The acquisition of a majority stake in Apcera strengthens Ericsson’s position in enterprise cloud.	Oct 2014

Fabrix	The acquisition of Fabrix Systems extends Ericsson’s overall leadership position in TV & Media.	Oct 2014

MetraTech	The acquisition of MetraTech accelerates Ericsson’s cloud and enterprise billing capabilities within BSS.	Sep 2014

Red Bee Media	A leading media services company headquartered in the UK with an extensive list of high-profile broadcast services customers.	May 2014

Azuki	A provider of TV Anywhere delivery platforms for service providers, content owners and broadcasters.	Feb 2014

Divestments 2014–2016


Company	Description	Transaction date
Birla Ericsson Optical Ltd	A divestment of the shares in the associated company.	Jul 2016

Ericsson Annual Report on Form 20-F 2016

C27 Leasing

Leasing with the Company as lessee

Assets under finance leases, recorded as property, plant and equipment, consist of:

Finance leases


	2016		2015
Cost
Real estate		—		701

		—		701
Accumulated depreciation
Real estate		—		–249

		—		–249

Net carrying value		—		452

Due to replacement of former lease contract with operating lease contract the Company has from 2016 no finance leases.

As of December 31, 2016, future minimum lease payment obligations were distributed as follows:

Future minimum lease payment obligations


	Finance leases		Operating leases
2017		—		3,120
2018		—		2,745
2019		—		1,985
2020		—		1,575
2021		—		1,717
2022 and later		—		5,493

Total		—		16,635
Future finance charges		—		n/a

Present value of finance lease liabilities		—		n/a

Expenses in 2016 for leasing of assets were SEK 3,710 (3,449) million, of which variable expenses comprised SEK 217 (35) million. The leasing contracts vary in length from 1 to 15 years.

The Company’s lease agreements normally do not include any contingent rents. In the few cases they occur, they relate to charges for heating linked to the oil price index. Most of the leases of real estate contain terms of renewal, giving the Company the right to prolong the agreement in question for a predefined period of time.

Leases with the Company as lessor

Leasing income relates to subleasing of real estate as well as equipment provided to customers under leasing arrangements. These leasing contracts vary in length from 1 to 16 years.

At December 31, 2016, future minimum payment receivables were distributed as follows:

Future minimum payment receivables


	Finance leases		Operating leases
2017		—		40
2018		—		21
2019		—		10
2020		—		7
2021		—		7
2022 and later		—		8

Total		—		93

Leasing income in 2016 was SEK 47 (73) million.

Ericsson Annual Report on Form 20-F 2016

C28 Information regarding members of the Board of Directors, the Group management and employees

Remuneration to the Board of Directors

Remuneration to members of the Board of Directors


SEK	Board fees		Number of synthetic shares/ portion of Board fee			Value at grant date of synthetic shares allocated in 2016 A		Number of previously allocated synthetic shares outstanding			Net change in value of synthetic shares ¹⁾ B			Committee fees		Total fees paid in cash ²⁾ C			Total remuneration 2016 (A+B+C)
Board member
Leif Johansson		4,075,000		0/0	%		—		—			—			400,000		4,475,000	⁴⁾		4,475,000
Helena Stjernholm		990,000		11,093/75	%		742,454		—			–148,979	¹⁾		175,000		422,500			1,015,975
Jacob Wallenberg		990,000		7,395/50	%		494,947		17,791			–444,785	¹⁾		175,000		670,000	⁵⁾		720,162
Nora Denzel		990,000		0/0	%		—		5,489			–127,656	¹⁾		250,000		1,240,000			1,112,344
Börje Ekholm ³⁾		742,500		8,319/75	%		556,790		35,360			–791,841	¹⁾		131,250		316,875			81,824
Ulf J. Johansson		990,000		0/0	%		—		—			—			350,000		1,340,000	⁶⁾		1,340,000
Kristin Skogen Lund		990,000		3,697/25	%		247,440		8,293			–229,741	¹⁾		250,000		992,500			1,010,199
Kristin S. Rinne		990,000		7,395/50	%		494,947		—			–99,315	¹⁾		—		495,000			890,632
Sukhinder Singh Cassidy		990,000		3,697/25	%		247,440		2,513			–112,727	¹⁾		175,000		917,500			1,052,213
Employee Representatives
Pehr Claesson		39,000		—			—		—			—			—		39,000			39,000
Mikael Lännqvist		31,500		—			—		—			—			—		31,500			31,500
Karin Åberg		30,000		—			—		—			—			—		30,000			30,000
Zlatko Hadzic (deputy)		18,000		—			—		—			—			—		18,000			18,000
Kjell-Åke Soting (deputy)		19,500		—			—		—			—			—		19,500			19,500
Roger Svensson (deputy)		19,500		—			—		—			—			—		19,500			19,500

Total		11,905,000		41,596			2,784,018		69,446			–1,955,044			1,906,250		11,026,875			11,855,849	⁷⁾

Total		11,905,000		41,596			2,784,018		96,508	⁸⁾		–2,422,266	⁸⁾⁹⁾		1,906,250		11,026,875			11,388,627	⁷⁾

1)	The difference in value as of the time for payment, compared to December 31, 2015, for synthetic shares allocated in 2011 (for which payment was made in 2016).

The difference in value as of December 31, 2016, compared to December 31, 2015, for synthetic shares allocated in 2012, 2013, 2014 and 2015. Calculated on a share price of SEK 53.50.

The difference in value as of December 31, 2016, compared to grant date for synthetic shares allocated in 2016.

The value of synthetic shares allocated in 2012, 2013, 2014 and 2015 includes respectively SEK 2.75, SEK 3.00, SEK 3.40 and SEK 3.70 per share in compensation for dividends resolved by the Annual General Meetings 2013, 2014, 2015 and 2016 and the value of the synthetic shares allocated in 2011 includes dividend compensation for dividends resolved in 2012, 2013, 2014 and 2015.

2)	Committee fee and cash portion of the Board fee.

3)	The Board remuneration resolved by the annual general meeting of shareholders is only for non-employee Board members. Since Börje Ekholm is employed by the Company as President and CEO since January 16, 2017, his shareholder resolved remuneration has been adjusted accordingly.

4)	In addition, an amount corresponding to statutory social charges in respect of the part of the fee that has been invoiced from a business was paid, amounting to SEK 1,406,045.

5)	In addition, an amount corresponding to statutory social charges in respect of the part of the fee that has been invoiced from a business was paid, amounting to SEK 210,514.

6)	In addition, an amount corresponding to statutory social charges in respect of the part of the fee that has been invoiced from a business was paid, amounting to SEK 219,224.

7)	Excluding social security charges and amounts invoiced through a business corresponding to such social security charges in to the amount of SEK 2,248,324.

8)	Including synthetic shares previously allocated to the former Directors Roxanne S. Austin and Alexander Izosimov.

9)	Including synthetic shares previously allocated to the former Director Nancy McKinstry and Sir Peter L. Bonfield. For these synthetic shares, the net change in value corresponds to the difference in value as of the time for payment compared to December 31, 2015.

Comments to the table

•

The Chairman of the Board was entitled to a Board fee of SEK 4,075,000 and a fee of SEK 200,000 for each Board Committee on which he served as Chairman.

•

The other Directors elected by the Annual General Meeting were entitled to a fee of SEK 990,000 each. In addition, the Chairman of the Audit Committee was entitled to a fee of SEK 350,000 and the other non-employee members of the Audit Committee were entitled to a fee of SEK 250,000 each. The Chairmen of the Finance and Remuneration Committees were entitled to a fee of SEK 200,000 each and the other non-employee members of the Finance and the Remuneration Committees were entitled to a fee of SEK 175,000 each.

•

Members of the Board, who are not employees of the Company, have not received any remuneration other than the fees and synthetic shares as above. None of the Directors have entered into a service contract with the Parent Company or any of its subsidiaries, providing for termination benefits.

•

Members and deputy members of the Board who are Ericsson employees received no remuneration or benefits other than their entitlements as employees and a fee to the employee representatives and their deputies of SEK 1,500 per attended Board meeting, and Committee meeting.

•

Board members invoicing for the amount of the Board and Committee fee from a business may add to the invoice an amount corresponding to social charges. The social charges thus included in the invoiced amount are not higher than the general payroll tax that would otherwise have been paid by the Company. The entire amount, i.e., the cash portion of the Board fee and the Committee fee, including social charges, constitutes the invoiced Board fee.

•

The Annual General Meeting 2016 resolved that non-employee Directors may choose to receive the Board fee (i.e., exclusive of Committee fee) as follows: i) 25% of the Board fee in cash and 75% in the form of synthetic shares, with a value corresponding to 75% of the Board fee at the time of allocation, ii) 50% in cash and 50% in the form of synthetic shares, or iii) 75% in cash and 25% in the form of synthetic shares. Directors may also choose not to participate in the synthetic share program and receive 100% of the Board fee in cash. Committee fees are always paid in cash.

The number of synthetic shares allocated is based on a volume-weighted average of the market price of Ericsson Class B shares on Nasdaq Stockholm during the five trading days immediately following the publication of Ericsson’s interim report for the first quarter 2016; SEK 66.93. The number of synthetic shares is rounded down to the nearest whole number of shares.

The synthetic shares are vested during the Directors’ term of office and the right to receive payment with regard to the allocated synthetic shares occurs after the publication of the Company’s year-end financial statement during the fifth year following the Annual General Meeting which

Ericsson Annual Report on Form 20-F 2016

resolved on the synthetic share program, i.e., in 2021. The amount payable shall be determined based on the volume-weighted average price for shares of Class B during the five trading days immediately following the publication of the year-end financial statement.

Synthetic shares were allocated to members of the Board for the first time in 2008 and have been allocated annually since then on equal terms and conditions. Payment based on synthetic shares allocated in 2011 occurred in 2016 and, in accordance with the terms and conditions for the synthetic share advance payment was then also made to the former Director Sir Peter L. Bonfield. The amounts paid in 2016 under the synthetic share programs were determined based on the volume-weighed average price for shares of Class B on Nasdaq Stockholm during the five trading days immediately following the publication of the year-end financial statements for 2015: SEK 74.68 and totalled SEK 2,245,951 excluding social security charges. The payments made do not constitute a cost for the Company in 2016. The Company’s costs for the synthetic shares have been disclosed each year and the net change in value of the synthetic shares for which payment was made in 2016, is disclosed in the table “Remuneration to members of the Board of Directors” on page 84.

The value of all outstanding synthetic shares fluctuates in line with the market value of Ericsson’s Class B share and may differ from year to year compared to the original value on their respective grant dates. The change in value of the outstanding synthetic shares is established each year and affects the total recognized costs that year. As of December 31, 2016, the total outstanding number of synthetic shares under the programs is 138,105 and the total accounted debt is SEK 8,207,895 (including synthetic shares previously allocated to the former Directors Roxanne S. Austin and Alexander Izosimov).

Remuneration to the Group management

The Company’s costs for remuneration to the Group management are the costs recognized in the Income statement during the fiscal year. These costs are disclosed under “Remuneration costs” below.

Costs recognized during a fiscal year in the Income statement are not fully paid by the Company at the end of the fiscal year. The unpaid amounts that the Company has in relation to the Group management are disclosed under “Outstanding balances.”

Remuneration costs

The total remuneration to the President and CEO and to other members of the Group management, consisting of the Executive Leadership Team (ELT), includes fixed salary, short- and long-term variable compensation, pension and other benefits. These remuneration elements are based on the guidelines for remuneration to Group management as approved by the Annual General Meeting held in 2016: see the approved guidelines in section “Guidelines for remuneration to Group management 2016.”

Remuneration costs for the President and CEO and other members of Executive Leadership Team (ELT)


SEK	President and CEO ¹⁾ 2016			President and CEO ²⁾ 2016		Total: President and CEO 2016		President and CEO 2015		Other members of ELT 2016		Other members of ELT 2015		Total 2016		Total 2015
Salary		40,069,722	³⁾		5,812,635		45,882,357		14,165,287		119,501,092		98,777,226		165,383,449		112,942,513
Cost for annual variable remuneration earned in the year to be paid the year after		—			—		—		16,173,429		6,230,285		45,485,406		6,230,285		61,658,835
Long-term variable compensation provision		8,240,244			486,839		8,727,083		7,183,919		9,278,252		8,671,955		18,005,336		15,855,873
Pension costs		10,350,001			1,604,757		11,954,758		9,452,006		29,387,498		24,608,406		41,342,256		34,060,412
Other benefits		44,080			25,912		69,992		75,630		12,604,635		8,247,554		12,674,627		8,323,184
Social charges and taxes		17,864,315			2,376,750		20,241,066		14,106,432		29,147,247		23,515,519		49,388,312		37,621,951

Total		76,568,362			10,306,894		86,875,256		61,156,702		206,149,008		209,306,065		293,024,265		270,462,767

1)	Hans Vestberg served as President and CEO until July 25, 2016 and left Ericsson as of January 25, 2017. Remuneration costs shown for Hans Vestberg includes this full period.

2)	Jan Frykhammar served as President and CEO from July 25, 2016 to January 16, 2017. Remuneration costs shown for Jan Frykhammar includes the period from July 25, 2016 to December 31, 2016 (costs for the rest of the year is included in “Other members of ELT 2016”).

3)	Includes severance pay and compensation for unused vacation.

Comments to the table

•

Hans Vestberg was President and CEO of Ericsson until July 25, 2016, and Jan Frykhammar was appointed President and CEO from July 25, 2016.

•

During 2016, there were two Executive Vice Presidents who have been appointed by the Board of Directors, none of which acted as deputy to the President and CEO during the year. Executive Vice Presidents are included in the group “Other members of ELT”.

•

The group “Other members of ELT” comprises the following persons: Per Borgklint, Bina Chaurasia (left ELT effective November 15 and Ericsson December 31, 2016), Ulf Ewaldsson, Jan Frykhammar, Nina Macpherson, Magnus Mandersson, Helena Norrman, Mats H. Olsson (left ELT effective May 18 and Ericsson November 18, 2016), Rima Qureshi, Angel Ruiz (left ELT effective June 30, 2016), Anders Thulin (left ELT and Ericsson June 30, 2016), and Jan Wäreby (left ELT effective June 30 and Ericsson November 30, 2016). In addition, Arun Bansal, Niklas Heuveldop, Chris Houghton, Fredrik Jejdling, Anders Lindblad, Jean-Philippe Poirault, Charlotta Sund and Elaine Weidman- Grunewald all joined ELT on July 1, 2016. Carl Mellander joined ELT on July 25, 2016 and MajBritt Arfert joined ELT on November 15, 2016.

•

The salary stated in the table for the President and CEO and other members of the ELT includes vacation pay paid during 2016 as well as other contracted compensation expensed in 2016. During 2016, a decision was taken by the Remuneration Committee to pay out saved vacation balances. These payments are included in salaries stated above.

•

The remuneration costs for 2016 includes termination provisions, including estimates of future severance pay and compensation for unused vacation, in respect of individuals who left Ericsson during 2016. For the former President and CEO, Hans Vestberg, the contractual severance pay amounted to 18 months’ salary (SEK 21,206,863 excluding social charges and taxes).

•

“Long-term variable compensation provision” refers to the compensation costs during 2016 for all outstanding share-based plans.

•

For the former President and CEO, Hans Vestberg, and other members of the ELT employed in Sweden before 2011, a supplementary plan is applied in addition to the occupational pension plan for salaried staff on the Swedish labor market (ITP) with pension payable from the age of 60 years. These pension plans are not conditional upon future employment at Ericsson.

Outstanding balances

The Company has recognized the following liabilities relating to unpaid remunerations in the Balance sheet:

•

Ericsson’s commitments for defined benefit based pensions as of December 31, 2016 under IAS 19 amounted to SEK 13,949,474 for the President and CEO which includes disability and survivor’s pension. For other members of the ELT the Company’s commitments amounted to SEK 44,800,609 of which SEK 38,333,332 refers to the ITP and early retirement and the remaining SEK 6,467,277 to disability and survivor’s pensions.

•

For previous Presidents and CEOs, the Company has made provisions for defined benefit pension plans in connection with their active service periods within the Company.

•

Deferred salary, earned in 2016 or earlier, to be paid 12 months after period end or later, amounts to SEK 9,665,780.

Ericsson Annual Report on Form 20-F 2016

Maximum outstanding matching rights

As of December 31, 2016

Number of Class B shares

The President
and CEO

Other members
of the ELT

Stock Purchase Plans 2013–2016 Executive Performance Stock Plans 2013–2016

84,871

388,296

Comments to the table

•

For the definition of matching rights, see the description in section “Long-term variable compensation”.

•

Matching result of 39.7% is included for the 2013 plan.

•

Cash conversion targets for 2014, 2015 and 2016 were reached.

•

During 2016, the two serving Presidents and CEOs received 90,086 matching shares and other members of the ELT received 122,648 matching shares.

Option agreements

Prior to taking office as President and CEO of Ericsson, Board member Börje Ekholm entered into an option agreement with Investor AB and AB Industrivärden, shareholders of Ericsson. Each of these two shareholders has issued 1,000,000 call options to Börje Ekholm on market terms (valuation conducted, using the Black & Scholes model, by an independent third party). Under the agreements, Börje Ekholm has purchased in total 2,000,000 call options, issued by the shareholders, for a purchase price of SEK 0.49 per call option. Each call option entitles the purchase of one Ericsson B share from the shareholders at a strike price of SEK 80 per share during one year after a seven-year period. Since the President and CEO has the power to influence the dividend paid by the Company, a potential conflict of interest exists. The option agreements therefore contain a strike price recalculation mechanism which is intended to make the options payoff neutral regardless of what the actual dividends are. Due to the fact that the call options were purchased on market terms as described above, no compensation expense has been recognized by the Company and will not be recognized during the remaining part of the seven-year period.

Guidelines for remuneration to Group management 2016

For Group management consisting of the Executive Leadership Team, including the President and CEO, total remuneration consists of fixed salary, short- and long-term variable compensation, pension and other benefits.

The following guidelines apply to the remuneration of the Executive Leadership Team:

•

Variable compensation is in cash and stock-based programs awarded against specific business targets derived from the long-term business plan approved by the Board of Directors. Targets may include financial targets at either Group or unit level, operational targets, employee engagement targets or customer satisfaction targets.

•

All benefits, including pension benefits, follow the competitive practice in the home country taking total compensation into account.

•

Long-Term Variable compensation

The Stock Purchase Plan

The Stock Purchase Plan has been designed to offer an incentive for all employees to participate in the Company where practicable. For the 2016 plan, employees are able to save up to 7.5% of their gross fixed salary (The former President and CEO, Hans Vestberg, could save up to 10% of gross fixed salary and short-term variable remuneration) for purchase of Class B contribution shares at market price on Nasdaq Stockholm or American Depositary Shares (ADSs) on NASDAQ New York (contribution shares) during a twelve-month period (contribution period). If the contribution shares are retained by the employee for three years after the investment and their employment with the Ericsson Group continues during that time, then the employee’s shares will be matched with a corresponding number of Class B shares or ADSs free of consideration. Employees in 100 countries participate in the plans.

The table below shows the contribution periods and participation details for ongoing plans as of December 31, 2016.

Stock Purchase Plans


Plan	Contribution period		Number of participants at launch		Take-up rate –percent of eligible employees
Stock Purchase plan 2013		August 2013–July 2014		29,000		29	%
Stock Purchase plan 2014		August 2014–July 2015		32,000		30	%
Stock Purchase plan 2015		August 2015–July 2016		33,800		31	%
Stock Purchase plan 2016		August 2016–July 2017		31,500		29	%

Participants save each month, beginning with the August payroll, towards quarterly investments. These investments (in November, February, May and August) are matched on the third anniversary of each such investment, subject to continued employment, and hence the matching spans over two financial years and two tax years.

No Stock Purchase Plan is being proposed for 2017.

The Key Contributor Retention Plan

The Key Contributor Retention Plan is part of Ericsson’s talent management strategy and is designed to give recognition for performance, critical skills and potential as well as to encourage retention of key employees. Under the program, up to 10% of employees (2016 plan: 10,742 employees nominated) are selected through a nomination process that identifies individuals according to performance, critical skills and potential. Participants selected obtain one extra matching share in addition to the ordinary one matching share for each contribution share purchased under the Stock Purchase Plan during a twelve-month period.

Since no Stock Purchase Plan will be proposed for 2017, alternative arrangements will be developed to replace the Key Contributor Plan.

Ericsson Annual Report on Form 20-F 2016

Executive Performance Stock Plan targets


	Base year value SEK billion		Year 1			Year 2			Year 3
2016
Growth (Net sales growth)		246.9		Compound annual growth rate of 2–6%
Margin (Operating income growth) ¹⁾		24.8		Compound annual growth rate of 5–15%
Cash Flow (Cash conversion)		—	³	70	%	³	70	%	³	70	%
2015
Growth (Net sales growth)		228.0		Compound annual growth rate of 2–6%
Margin (Operating income growth) ¹⁾		16.8		Compound annual growth rate of 5–15%
Cash Flow (Cash conversion)		—	³	70	%	³	70	%	³	70	%
2014
Growth (Net sales growth) ²⁾		225.3		Compound annual growth rate of 2–8%
Margin (Operating income growth) ²⁾		15.7		Compound annual growth rate of 5–15%
Cash Flow (Cash conversion)		—	³	70	%	³	70	%	³	70	%

1)	Excluding extraordinary restructuring charges.

2)	Base year 2013 has been adjusted for the impact of the Samsung IPR agreement.

The Executive Performance Stock Plan

The Executive Performance Stock Plan has been designed to focus management on driving earnings and provide competitive remuneration. Senior managers, including ELT, were selected to obtain up to four or six extra shares (performance matching shares) in addition to the ordinary one matching share for each contribution share purchased under the Stock Purchase Plan. Up to 0.5% of employees (2016 plan: 509 executives) are offered participation in the plan. The former President and CEO, Hans Vestberg, could save up to 10% of gross fixed salary and short-term variable compensation, and could obtain up to nine performance-matching shares in addition to the Stock Purchase Plan matching share for each contribution share. The performance targets are linked to growth of Net Sales, Operating Income and Cash Conversion.

The table “Executive Performance Stock Plan targets” show ongoing Executive Performance Stock Plans as of December 31, 2016.

Shares for all plans


		Stock Purchase Plan, Key Contributor Retention Plan and Executive Performance Stock Plans
Plan (million shares)		2016			2015			2014			2013			2012			Total
Originally designated	A		21.6			23.5			22.8			26.6			26.2			120.7
Outstanding beginning of 2016	B		—			4.4			13.5			11.5			6.6			36.0
Awarded during 2016	C		7.6			16.1			—			—			—			23.7
Exercised/matched during 2016	D		—			1.0			1.0			3.0			6.5			11.5
Forfeited/expired during 2016	E		0.1			0.8			0.7			1.5			0.1			3.2
Outstanding end of 2016 ¹⁾	F=B+C–D–E		7.5			18.7			11.8			7.0			—			45.0
Compensation costs charged during 2016 (SEK million) ³⁾	G		11.7	²⁾		288.3	²⁾		348.5	²⁾		250.1	²⁾		58.1	²⁾		956.7

1)	Shares under the Executive Performance Stock Plans were based on the fact that the 2012 plan came out at 33%, in casu 67% lapsed and that the 2013 plan vested for 39.7% and lapsed for 60.3%. For the other ongoing plans, cost is estimated.

Fair value is calculated as the share price on the investment date, reduced by the net present value of the dividend expectations during the three-year vesting period. Net present value calculations are based on data from external party. For shares under the Executive Performance Stock Plans, the company makes a forecast for the fulfillment of the financial targets for all ongoing plans except for 2012 and 2013 plans as disclosed under 1) when calculating the compensation cost. Fair value of the Class B share at each investment date during 2016 was: February 15 SEK 63.62, May 15 SEK 50.52, August 15 SEK 50.39 and November 15 SEK 38.83.

3)	Total compensation costs charged during 2015: SEK 865 million, 2014: SEK 717 million.

Shares for all plans

All plans are funded with treasury stock and are equity settled. Treasury stock for all plans has been issued in directed cash issues of Class C shares at the quotient value and purchased under a public offering at the subscription price plus a premium corresponding to the subscribers’ financing costs, and then converted to Class B shares.

For all plans, additional shares have been allocated for financing of social security expenses. Treasury stock is sold on the Nasdaq Stockholm to cover social security payments when arising due to matching of shares. During 2016, 1,706,600 shares were sold at an average price of SEK 61.31. Sales of shares are recognized directly in equity.

If, as of December 31, 2016, all shares allocated for future matching under the Stock Purchase Plan were transferred, and shares designated to cover social security payments were disposed of as a result of the exercise and the matching, approximately 64 million Class B shares would be transferred, corresponding to 2.0% of the total number of shares outstanding, or 3,269 million not including treasury stock. As of December 31, 2016, 62 million Class B shares were held as treasury stock.

The table above shows how shares (representing matching rights but excluding shares for social security expenses) are being used for all outstanding plans. From up to down the table includes (A) the number of shares originally approved by the Annual General Meeting; (B) the number of originally designated shares that were outstanding at the beginning of 2016; (C) the number of shares awarded during 2016; (D) the number of shares matched during 2016; (E) the number of shares forfeited by participants or expired under the plan rules during 2016; and (F) the balance left as outstanding at the end of 2016, having added new awards to the shares outstanding at the beginning of the year and deducted the shares related to awards matched, forfeited and expired. The final row (G) shows the compensation costs charged to the accounts during 2016 for each plan, calculated as fair value in SEK.

For a description of compensation cost, including accounting treatment, see Note C1, “Significant accounting policies,” section Share-based compensation to employees and the Board of Directors.

Ericsson Annual Report on Form 20-F 2016

Employee numbers, wages and salaries

Employee numbers

Average number of employees


	2016						2015
	Women		Men		Total		Women		Men		Total
North America		2,862		10,667		13,529		3,117		11,912		15,029
Latin America		2,343		8,672		11,015		2,583		9,812		12,395
Northern Europe & Central Asia ¹⁾ ²⁾		5,070		14,941		20,011		5,256		15,549		20,805
Western & Central Europe ²⁾		2,502		11,312		13,814		2,399		10,144		12,543
Mediterranean ²⁾		3,035		9,718		12,753		3,122		10,023		13,145
Middle East		374		2,775		3,149		513		3,215		3,728
Sub-Saharan Africa		369		1,795		2,164		520		1,997		2,517
India		4,396		17,983		22,379		3,967		17,865		21,832
North East Asia		4,297		9,186		13,483		4,178		9,446		13,624
South East Asia & Oceania		1,688		2,431		4,119		1,200		2,900		4,100

Total		26,936		89,480		116,416		26,854		92,864		119,718
¹⁾ Of which in Sweden		3,650		12,359		16,009		4,002		13,106		17,108
²⁾ Of which in EU		10,056		33,852		43,907		10,052		33,908		43,960

Number of employees by region at year-end


	2016		2015
North America		11,547		14,548
Latin America		9,513		10,412
Northern Europe & Central Asia ¹⁾ ²⁾		19,136		20,700
Western & Central Europe ²⁾		13,646		12,220
Mediterranean ²⁾		12,578		12,702
Middle East		3,346		3,639
Sub-Saharan Africa		2,086		2,301
India		22,552		21,999
North East Asia		13,042		13,706
South East Asia & Oceania		4,018		4,054

Total		111,464		116,281
¹⁾ Of which in Sweden		15,303		17,041
²⁾ Of which in EU		42,625		43,117

Number of employees by gender and age at year-end 2016


	Women			Men			Percent of total
Under 25 years old		2,037			2,767			4	%
25–35 years old		10,562			32,120			38	%
36–45 years old		7,036			27,594			31	%
46–55 years old		4,375			17,817			20	%
Over 55 years old		1,539			5,617			7	%

Percent of total		23	%		77	%		100	%

Employee movements


	2016		2015
Headcount at year-end		111,464		116,281
Employees who have left the Company		19,865		16,610
Employees who have joined the Company		15,048		14,836
Temporary employees		1,148		1,413

Employee wages and salaries

Wages and salaries and social security expenses


(SEK million)	2016		2015
Wages and salaries		60,064		60,805
Social security expenses		17,710		19,249
Of which pension costs		5,254		5,793

Amounts related to the President and CEO and the Executive Leadership Team are included in the table above.

Remuneration to Board members and Presidents in subsidiaries


(SEK million)	2016		2015
Salary and other remuneration		462		368
Of which annual variable remuneration		106		56
Pension costs		38		47

Board members, Presidents and Group management by gender at year end


	2016						2015
	Women			Men			Women			Men
Parent Company
Board members and President		46	%		54	%		36	%		64	%
Group Management		35	%		65	%		31	%		69	%
Subsidiaries
Board members and Presidents		19	%		81	%		13	%		87	%

Ericsson Annual Report on Form 20-F 2016

C29 Related party transactions

During 2016, various minor related party transactions were executed pursuant to contracts based on terms customary in the industry and negotiated on an arm’s length basis. For information regarding equity and Ericsson’s share of assets, liabilities and income in joint ventures and associated companies, see Note C12, “Financial assets, non-current. ” For information regarding transactions with the Board of Directors and Group management, see Note C28, “Information regarding members of the Board of Directors, the Group management and employees.”

For information about the Company’s pension trusts, see Note C17, ”Post-employment benefits.”

C30 Fees to Auditors

Fees to auditors


	PwC		Others		Total
2016
Audit fees		90		3		93
Audit-related fees		10		—		10
Tax fees		10		8		18
Other fees		16		11		27

Total		126		22		148
2015
Audit fees		91		2		93
Audit-related fees		11		—		11
Tax fees		19		13		32
Other fees		8		—		8

Total		129		15		144
2014
Audit fees		83		7		90
Audit-related fees		11		0		11
Tax fees		15		4		19
Other fees		18		1		19

Total		127		12		139

During the period 2014–2016, in addition to audit services, PwC provided certain audit-related services, tax and other services to the Company. The audit-related services include quarterly reviews, ISO audits, SSAE 16 reviews and services in connection with the issuing of certificates and opinions and consultation on financial accounting. The tax services include general expatriate services and corporate tax compliance work. Other services include, work related to acquisitions and operational effectiveness.

Audit fees to other auditors largely consist of local statutory audits.

C31 Contractual obligations

Contractual obligations 2016


	Payment due by period
SEK billion	<1 year		1–3 years		3–5 years		>5 years		Total
Current and Non-current debt ¹⁾ ²⁾		8.0		1.0		8.8		9.4		27.2
Finance lease obligations ³⁾		—		—		—		—		—
Operating leases ³⁾		3.1		4.7		3.3		5.5		16.6
Other non-current liabilities		—		0.2		—		2.4		2.6
Purchase obligations ⁴⁾		5.3		0.5		1.2		—		7.0
Trade payables		25.3		—		—		—		25.3
Commitments for customer finance ⁵⁾		13.1		—		—		—		13.1

Total		54.8		6.4		13.3		17.3		91.8

1)	Including interest payments.

2)	See also Note C19, “Interest-bearing liabilities.”

3)	See also Note C27, “Leasing.”

4)	The amounts of purchase obligations are gross, before deduction of any related provisions.

5)	See also Note C14, “Trade receivables and customer finance.”

For information about financial guarantees, see Note C24, “Contingent liabilities.”

Except for those transactions described in this report, the Company has not been a party to any material contracts over the past three years other than those entered into during the ordinary course of business.

C32 Events after the reporting period

New segment structure from January 1, 2017

From January 1, 2017, financial reporting is done according to the new structure, i.e., by the new segments Networks, IT & Cloud and Media.

Börje Ekholm takes office as CEO and President

Börje Ekholm takes office as CEO and President. On January 16, 2017, Ericsson announced that in connection with Börje Ekholm assuming the position as President and CEO of Ericsson, Jan Frykhammar, who has temporarily held the position as President and CEO, remains a member of the Executive Leadership Team and is appointed Executive Vice President and advisor to the CEO. Jan Frykhammar will support Börje Ekholm during a transition period and will focus on corporate governance and efficiency.