With the exception of the statement of cash flows, which is presented according to the indirect method as from 2007, the Group has applied the policies consistently compared with previous years. Comparative figures have been reclassified to comply with this year's presentation.

a) Basis for consolidation

Subsidiaries

The companies in which KONGSBERG has control are recognised in the consolidated financial statements as subsidiaries. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Control is usually achieved when the Group, directly or indirectly, owns more than 50 per cent of the shares in the entity, or when the Group is able to exert control over the entity through agreements or statutes. In assessing control, account is taken of potential votes that can immediately be exercised or are convertible.

New subsidiaries are recognised at their fair value on the date of acquisition. Fair value is allocated to identified assets and liabilities. Excess value that cannot be allocated to specific assets is classified as goodwill. See Note 4 "Fair value" for the calculation of fair value, as well as Note 6 "Changes in the Group's structure". New subsidiaries are included in the consolidated accounts from the date of acquisition. The date of acquisition is the date on which KONGSBERG obtains control of the acquired company. Ordinarily, control will be achieved when all the terms of the agreement are satisfied. A lack of satisfaction will result in cancellation of the agreement. Examples can be the approval of the Board of Directors, the general meeting or the competition authorities. For business combinations achieved in stages, the financial statements are based on the values at the time the Group obtained control. Excess value in the form of goodwill is calculated on each individual acquisition. Entities that constitute the Group are listed in Note 33 "List of Group entities". Subsidiaries disposed of during the year are included in the consolidated financial statement until the date on which the control ceases. Ordinarily, control will cease when all terms in the agreement are satisfied. A lack of satisfaction will result in the cancellation of the agreement. Operations disposed of during the period and which constitute independent business segments are presented as discontinued operations on a separate line on the income statement for the entire financial year and in the comparative figures.

Associates

Associates are entities in which the Group has significant influence, but not control (presumably a stake from 20 to 50 per cent) over financial and operating policies. Significant influence is the power to participate in the financial and operating policy decisions of the invested company, but where KONGSBERG does not have control or joint control over those policies. Where the stake is less than 20 per cent, it must be clearly demonstrated that significant influence exists, for example, through shareholder agreements. The consolidated financial statements include the Group's percentage of the profit/(loss) from associates using the equity method of accounting from the date on which significant influence is achieved and until such influence ceases. When the Group's percentage of a loss exceeds the value of the investment, the carrying amount of the investment is reduced to zero and no further losses are recognised. The exceptions are cases in which the Group has an obligation to cover the losses.

Jointly controlled entities

Joint control is the contractually agreed sharing of control over an economic activity, and it exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties having control (participants). Investments in jointly controlled entities used to be presented using the equity method, i.e. the percentage of the result was presented on the line for profit/(loss) from associates/jointly controlled entities and on the balance sheet as an investment in associates/jointly controlled entities. Following closer consideration about what gives the most accurate presentation of the activities in jointly controlled entities, in 2006, KONGSBERG chose to switch to proportional consolidation. Proportional consolidation means that the assets, liabilities, revenues and expenses of jointly controlled entities are merged line item by line item with similar line items in the consolidated financial statements.

Elimination of transactions

Intra-Group balances and unrealised gains and losses that arise between Group entities are eliminated upon consolidation. Unrealised gains from transactions with associates are eliminated proportionally against the investment. Unrealised losses are eliminated correspondingly, unless they are related to impairment. All intra-Group transactions are eliminated in the consolidation process.

Minority interests

Minority interests are included in consolidated equity as a separate line item. The minority share of the profit/(loss) is included in the net profit for the year. Minority interests include the minority's share of the carrying amount of subsidiaries, including a percentage of identified excess value on the date of acquisition.

Losses in a consolidated subsidiary that can be attributed to a minority interest cannot exceed the minority's share of equity in the consolidated subsidiary. Excess losses are recognised directly in the equity holders of the parent in the subsidiary to the extent that the minority is not obligated and can cover its share of the loss. If the subsidiary starts making a profit, the equity holders of the parent's share of the subsidiary's equity will be adjusted until the minority's share of past losses is covered.

b) Foreign currency

Trade receivables, other receivables, trade payables and other financial liabilities are translated at the exchange rates that apply on the date of balance sheet recognition. Gains and losses related to foreign exchange items in the normal operating cycle are classified as operating revenues and expenses. Other gains and losses related to items in foreign currency are classified as financial income or expenses.

Translation – foreign subsidiaries

Assets and liabilities in foreign business activities, including goodwill and adjustments to fair value in connection with acquisitions, are translated to NOK using the exchange rate on the date of balance sheet recognition. Revenues and expenses in foreign currencies are translated to NOK using the exchange rate at the time of the transaction. Since KONGSBERG has no seasonal variations or large individual transactions in foreign currencies, revenues and expenses in foreign currencies are translated at average rates for the whole year. Translation differences are taken directly to the Group's equity (translation reserve). Upon the disposal of all or part of a foreign entity, the accumulated translation difference related to the entity is reversed and recognised during the same period as a gain or loss on the sale.

c) Revenue recognition

In connection with revenue recognition, KONGSBERG distinguishes between construction contracts, goods/standard production/services and licensing with related services.

Construction contracts/system deliveries

KONGSBERG's operations consist mainly of developing and manufacturing products and systems based on orders received.

A construction contract is a contract negotiated for the construction of an asset or a combination of assets that are closely related or interdependent. KONGSBERG has laid down the following criteria to define a construction contract:

1) A binding contract negotiated individually which takes a customer's special requirements into account;

2) Construction based on the customer's specifications which entail individual design and/or development;

3) The contract is enforceable and cancellation will require the customer to cover the expenses incurred in connection with construction at the very least;

4) Construction takes place over several accounting periods;

5) The various elements/components/services in the contracts cannot be sold separately.

The value of the work in progress is recognised as operating revenue. Uninvoiced work in progress is reported on the balance sheet under "Projects in progress". Work in progress is stipulated as incurred production costs plus a proportional share of the estimated contract profit. Production costs include direct wages, direct materials and a proportional share of the individual business areas' indirect costs, distributable by projects, while general development costs, sales costs and common administrative costs are not included in production costs.

Accrued contract profit includes the interest income on prepayments from customers that exceeds the capital tied up in the individual projects. The estimated accrued contract profit shall not exceed a proportional share of the estimated total contract profit. The proportional share of the contract profit is based on the degree of completion of the individual project, which is largely determined by the costs incurred as a ratio of the expected overall costs at the time of measurement. If the profit on a contract cannot be estimated with a reasonable degree of certainty, the project will be recognised without a profit until the uncertainty is manageable. All projects are followed up on an ongoing basis with project costings. Where a costing anticipates a loss on the remainder of a project, the loss will be expensed immediately in its entirety.

The Group changed the classification of projects in progress and prepayments from customers in 2005. Projects in progress are now presented as a separate line item on the balance sheet. Prepayments from customers used to be presented on two lines, deferred income and prepayments from customers. Deferred income was defined as accumulated invoicing in excess of accumulated operating revenues, and was presented under "Other current liabilities". Prepayments from customers involved only the invoicing of prepayments, which were subsequently settled by invoice. Deferred income and prepayments from customers are now presented as prepayments from customers on one line, as this gives a better idea of the Group's obligations when it comes to long-term construction contracts. In addition, as from 2007, project accruals are shown as a separate line item and the comparative figures for 2006 as classified in the same way. Project accruals are defined as net variable costs incurred proportionate to the degree of project completion less accumulated direct costs recognised for the project. They were previously included as part of prepayments from customers. The classification of projects on the balance sheet is done on a project-by-project basis, or sometimes even customer-by-customer.

Change orders are defined as additions to existing delivery contracts. Change orders are recognised when the probability of customer acceptance of the change order can be ascertained with a high degree of certainty. Additional contractual services and estimated additional costs are included in the original project costings and recognised as revenue to the stage of completion of the overall project.

Series deliveries are considered a series of similar deliveries covered by a single contract, or several contracts with the same buyer at the same time, and where the individual deliveries could not have been negotiated separately on the same terms. Series deliveries are recognised as income with a shared profit on the contract and the same degree of completion.

In special cases, work on projects will commence and expenses will be incurred before a customer places a formal order. This presupposes a very preponderant probability that a contract will be signed.

Goods/services

The ordinary sale of goods and standard production not covered by a construction contract are usually recognised upon delivery. Delivery is considered complete when the customer takes over significant risks and benefits for a delivered product. If the sale is conditional upon customer acceptance, the date of acceptance should be the date of revenue recognition for the sale.

In addition to assuming the risk and the advantages, the following criteria must be satisfied for recognition:

– It is probable that the remuneration can be collected.

– The income can be measured reliably.

The amount recognised is measured as the fair value of the consideration or receivable.

Services delivered which are not part of a construction contract or licensed sales are recognised as revenue incrementally as the service is provided, as described under construction contracts.

Licence revenues

The Group also sells licences for the use of software systems. Licence revenues are normally recognised as revenue in their entirety when the system is delivered. For a definition of when a product is considered to have been delivered, see the description under "Goods/services" above. In cases that involve adaptations or additional work, the total contract amount including consideration for the licences is recognised as revenue to the same stage of completion as deliveries, as described under "Construction contracts/system deliveries". Maintenance and service/ support are recognised as revenue incrementally as the service is performed or on a straight-line basis during the period in which the service is performed.

Combined deliveries of goods, services and license sales

The recognition criteria shall be applied separately for each transaction. Where there are combined deliveries with different recognition criteria, the various elements must be identified and recognised as income separately. As regards the sale of goods accompanied by maintenance services, the goods are recognised as income upon delivery, while the maintenance services are considered deferred income and recognised as income over the period in which the service is performed.

When the prices of the various elements for delivery are stipulated in a contract, the income will be based on these prices and the stipulated price of the licence will be recognised upon delivery. For service and maintenance, the stipulated price of the service will be deferred and recognised on a straight-line basis over the period in which service and maintenance are performed.

Upon the sale of different elements covered by a single fixed price contract, KONGSBERG has the following principles for the recognition and measurement of income:

• Identification of the various elements for delivery, e.g. licence, service, maintenance and consultancy services.
• Projected costs are estimated for each element, e.g. service, maintenance and consultancy services. Further, a reasonable profit margin is estimated on the various elements, e.g. service, maintenance and consultancy services. The method and the assumption for estimation are consistent from one period to the next.
• The estimated cost plus the profit margin will be deferred income and recognised on a straight-line basis throughout the period in which the services are performed.
• The remainder of the contract amount, less estimated income from the above-mentioned elements, is estimated as licence income and recognised upon delivery.

d) Income tax expense

Income tax expenses on the financial statements include tax payable and the change in deferred tax for the period. The change in deferred tax reflects the future tax payable resulting from the current year's activities. Deferred tax is based on accumulated profit, but which will be payable in subsequent accounting periods. Deferred tax is calculated on net tax-increasing differences between the balance sheet items used for accounting purposes and those used for taxation purposes, adjusted for deductible temporary tax differences and tax losses carried forward according to the liability method. Income from long-term construction contracts with responsibility for performance is not recognised for tax purposes until the risk and responsibility has been transferred to the customer. Owing to KONGSBERG's volume of large, long-term contracts, there are therefore considerable taxable temporary differences.

Deferred tax assets are only capitalised to the extent that it is probable that there will be future taxable income available for reducing the difference. Deferred tax assets are assessed for each period and will be reversed if it is no longer probable that the deferred tax asset can be used.

e) Financial income and financial expenses

Financial income consists of interest income, dividends, foreign currency gains, changes in the value of assets to fair value through the profit and loss, and gains on the disposal of available-for-sale assets where the changes in value are recognised directly to equity. Interest income is recognised as it accrues using the effective interest method, while dividends are recognised on the date on which the annual general meeting adopts the dividends.

Financial expenses consist of interest expenses, foreign currency losses, impairments on available-for-sale shares, changes in the value of assets to fair value through profit or loss, and losses on the sale of assets available for sale where the changes in value are recognised directly in equity. Interest expenses are recognised gradually as they accrue using the effective interest method.

f) Intangible assets

Goodwill

Goodwill arises in connection with the acquisition of a business activity (business combination) where the consideration exceeds the value of identifiable assets and liabilities. Goodwill is recognised on the balance sheet at cost less any accumulated impairment loss. Goodwill is allocated to cash-generating units that are expected to gain financial benefits from the synergies that arise from the business combination. A cash-generating unit is the smallest identifiable group that generates a cash inflow that is largely independent from other assets or groups. Goodwill is non-depreciable, but tested for impairment annually in Q4, and whenever there are indications of impairment on the balance sheet date. Impairment is calculated by estimating the value of the individual cash-generating unit, based on the calculation of expected future cash flows. Goodwill is described in Note 15 "Impairment test of goodwill". See also description 3 i) "Summary of significant accounting policies - Impairment of non-financial assets".

Research

Expenses for research activities, including development projects in the research phase, are recognised as they are incurred. Research refers to original, planned investigations performed to gain new scientific or technical knowledge and understanding. Examples include the search for new knowledge, or the search for alternative materials, devices, products, processes, systems or services.

Development

Expenses related to development activities, including development projects in the development phase, are capitalised if the development activities or the development project meet the defined criteria for capitalisation. Development involves plans or designs for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use. In determining whether an activity is the development of a new system, new functionality or module, it is necessary to determine whether the object of the development can be operated independently of existing systems/ products for sale. KONGSBERG has considered the criteria for significant improvements to be an increase of more than 20 per cent of the value from before to after the development or replacement cost of the system. Examples of development are the design, construction and testing of prototypes or models prior to production or use, and the design, construction and testing of a particular alternative for new of significantly improved materials, devices, products, processes, systems or services.

The capitalisation of development costs requires that those costs can be measured reliably, the product or process is technically and commercially feasible, future financial benefits are probable and KONGSBERG intends to and has sufficient resources to complete development and to use or sell the asset. Other development costs are expensed as they are incurred.

When the criteria for capitalisation are satisfied, expenses recognised on the balance sheet will include the cost of materials, direct payroll expenses and a percentage of directly attributable administrative expenses. Capitalised development costs are recognised on the balance sheet at acquisition cost less accumulated depreciation and impairment loss. Amortisations are stipulated on the basis of the expected useful life based on the total number of production units or the number of years. The remaining expected useful life and expected residual value are reviewed annually. Calculation of the economic benefits is performed on the basis of the same principles and methods as impairment testing, and rests on long-term budgets approved by the Board. For more details about estimation, see Note 14 "Intangible assets".

Assessments of the fulfilment of the criteria for capitalising development costs take place at a pace commensurate with the progress of the ongoing development projects. Based on technical success and market assessments, a decision is made during the development phase about whether to complete development and begin capitalisation.

Maintenance

Maintenance is the work that must be performed on products or systems to ensure their expected useful life. Where a significant improvement is performed on a product or system which entailed, for instance, an extension of the life cycle, or that the customer is willing to pay more for the improvement, this is to be considered development. Expenses related to maintenance are expensed as they are incurred.

Other intangible assets

Other intangible assets that are acquired and have a finite useful life are measured at cost less accumulated amortisation, as well as accumulated earlier impairment loss. Amortisation is based on expected useful life based on total production units or number of years. Estimated useful life and the stipulation of the amortisation rate are reviewed during each period.

g) Property, plant and equipment

Property, plant and equipment are recognised at cost less accumulated depreciation and impairment loss. Cost includes expenses that are directly attributable to the acquisition of the assets. Property, plant and equipment are depreciated on a straight-line basis over their expected useful life. When individual parts of a property, a plant or equipment have different useful lives, and the cost is significant in relation to total cost, these are depreciated separately. Expected residual value is taken into account when stipulating the depreciation schedule. Remaining estimated useful life and estimated residual value are reviewed annually. Expenses incurred after production equipment is in use, such as ongoing maintenance, are recognised, but other expenses which are expected to offer future financial advantages are capitalised.

h) Leases, sale and leaseback

Leases or sales with leaseback where KONGSBERG generally takes over all risk and all benefits related to ownership, are classified as financial leases. In connection with first-time recognition, the asset is measured at fair value or at the net present value of the agreed minimum rent, whichever is lower. After first-time recognition, the same accounting policies are used as are used for the corresponding asset. Others leases are operational leasing agreements and are not recognised on the Group's balance sheet. KONGSBERG's sale and leaseback agreements are considered to satisfy the criteria for operational leasing agreements. Where a sale and leaseback agreement is defined as a loss-making contract according to IAS37, the present value is added into the expected loss.

i) Impairment of non-financial assets

All non-financial assets, with the exception of inventories and deferred tax assets, are reviewed for each reporting period to determine whether there are indications of impairment. Where indications of impairment exist, recoverable amounts are calculated. For goodwill, recoverable amounts are estimated for each reporting period by each cash-generating unit. Impairment tests are described in Note 15 "Impairment test of goodwill".

The recoverable amount of an asset or cash-generating unit is its value in use or fair value less costs to sell, whichever is higher. In estimating value in use, expected future cash flows are discounted to net present value using a discount rate before tax that reflects today's market assessments of the time value and the specific risk attached to the asset. The recoverable amount is calculated using the estimated future cash flow based on the Group's five-year budgets, as well as the estimated nominal growth rate beyond the budgeted five-year period. The budget has been approved by KONGSBERG's management and Board of Directors.

Impairment is recognised if the carrying amount of an asset or cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable group that generates a cash inflow that is largely independent of other assets or groups. Impairment related to cash-generating units is intended first to reduce the carrying amount of any goodwill allocated to the unit and then to reduce the carrying amount of the other assets in the unit on a pro rata basis. These assets will normally be property, plant and equipment, and other intangible assets.

Impairment of goodwill cannot be reversed. Other assets which have been subject to impairment losses are reviewed during each period to determine whether there are indications that the impairment loss has been reduced or no longer exists. Reversals of earlier impairments are made only to the extent of the carrying amount the assets might have had after depreciation and amortisation, if no impairment loss had been recognised.

j) Financial instruments

Financial assets and liabilities

Financial assets and liabilities consist of derivatives, investments in shares, trade receivables and other receivables, cash and short-term deposits, loans, trade payables and other liabilities. A financial instrument is recognised when the Group becomes party to the instrument's contractual provisions. Upon initial recognition, financial assets and liabilities are assessed at fair value plus directly attributable expenses. The exception is financial instruments, where change in fair value are recognised through the profit or loss that expense directly attributable costs. An ordinary purchase or sale of financial assets is recognised and derecognised from the time an agreement is signed. Financial assets are derecognised when the Group's contractual rights to receive cash flows from the assets expire, or when the Group transfers the asset to another party and without retaining control, or transfers practically all risk and rewards associated with the asset. Financial liabilities are derecognised when the Group's obligation as specified by contract has been satisfied, discharged or cancelled.

Classification

The Group classifies financial assets and liabilities in the following categories:

i) fair value with changes in the value through the profit or loss (held for trading);

ii) financial assets and liabilities held to maturity;

iii) available-for-sale financial assets, and

iiii) other financial liabilities.

Receivables and liabilities related to operations are measured at their amortised cost, which in practice implies their nominal value with any impairment for expected losses. The Group's borrowings are considered financial liabilities held to maturity. These are recognised at their amortised cost using the effective interest rate method.

All shares except for shares in subsidiaries or jointly controlled entities on the balance sheet at 31 December 2007 are defined as financial instruments available for sale. Available-for-sale financial assets are measured at fair value on the balance sheet date. Changes in the value of available-for-sale financial assets are recognised directly in equity, except for impairment loss that is recognised through profit or loss. See Note 4 "Fair value" for a more detailed description of how fair value is measured for financial assets and liabilities.

Impairment of financial assets

Where there is objective evidence that a financial asset's value is lower than its cost, the asset will be impaired through profit or loss. Impairment in the value of assets measured at amortised cost is calculated by taking the difference between the carrying amount and the net present value of the estimated future cash flow discounted by the original effective interest rate. As regards available-for-sale assets, an asset is impaired when its present fair value is lower than its cost and the impairment is regarded as significant or to be a prolonged decline. Ordinarily, KONGSBERG would assume that an impairment of more than 20 per cent of the cost is significant and that a prolonged decline in value as one lasting for more than nine months is not of a temporary nature.

Accumulated losses recognised directly in equity will also be transferred through profit or loss on the impaired assets. Impairment can be reversed if the reversal can be related to a significant rise in the value after the impairment was recognised. For financial assets measured at their amortised cost and available-for-sale bonds, any reversal will be recognised through profit or loss. Upon the reversal of financial assets that are investments in equity instruments, the change in value will be recognised directly in equity.

Derivatives

For KONGSBERG, derivatives encompass forward foreign exchange contracts, currency options and interest swap agreements. Upon initial recognition, derivatives are measured at fair value, and identifiable transaction costs are recognised as they are incurred. Changes in the fair value of derivatives are recognised through the profit and loss, unless they qualify for hedge accounting.

Hedging

Before a hedge transaction is conducted, the Group's financial affairs department determines whether a derivative (or another financial instrument) should be used to:

i) hedge the fair value of a recognised asset or liability or a firm commitment;

ii) hedge a future cash flow from a recognised asset or liability, an identified highly probable future transaction or, in the case of currency risk, a bon-recognised firm commitment; or

iii) hedge a net investment in a foreign operation. Foreign currency risk is hedged on the basis of the hedge instrument's forward price.

KONGSBERG's criteria for classifying a derivative or other financial instrument as a hedge instrument are as follows:

(1) the hedge is expected to be highly effective for counteracting changes in fair value or cash flows to an identified object – the hedging effectiveness must be expected to be very high;

(2) the effectiveness of the hedge can be measured reliably;

(3) satisfactory documentation has been presented upon establishing the hedge to show among other things that the hedge is effective;

(4) for cash flow hedges, that the forthcoming transaction must be highly probable; and

(5) that the hedge has been evaluated on an ongoing basis and has proven effective, usually within the interval of 80 to 125 per cent.

(i) The hedging of fair value (project hedges)

KONGSBERG has a policy of hedging all contractual currency flows. Derivatives identified as hedge instruments are valued at fair value and changes in fair value are taken gross to the balance, with a corresponding adjustment of the hedged item. The hedge designation will be discontinued if:

(a) the hedging instrument expires, or is terminated, exercised or sold;

(b) the hedge no longer satisfies the above-mentioned hedge accounting criteria; or

(c) the Group decides to discontinue hedge accounting for other reasons.

(ii) Cash flow hedges (hedges of forecasted sale and interest hedges)

KONGSBERG's policy is to limit foreign currency risk while actively assessing various currencies' importance as competitive parameters. Parts of future predicted currency flows are hedged in accordance with an established strategy (hedges of forecasted sale). KONGSBERG hedges its loans inter alia using interest swap agreements (interest hedges). The effective share of the changes in the fair value of a hedging instrument is recognised directly in equity. The ineffective share of the hedge instrument that is outside the interval from 80 to 125 per cent is recognised on an ongoing basis.

When a hedged transaction takes place, the accumulated change in value of the hedge instrument is recognised out of equity and through the profit or loss.

If hedging an expected transaction subsequently leads to the recognition of a financial asset or liability, the resultant gain or loss to equity will be reclassified on the income statement during the same period(s) as the asset or liability influences the result. For example, that the gain/loss upon redemption/rollover of the currency futures is capitalised as long as the hedge applies. The gain/loss is recognised in equity at a pace commensurate with the project's progress. The term "rollover" refers to the situation when existing currency futures are redeemed and new currency futures are signed.

If a hedge instrument expires without being rolled over or if the hedge relationship is discontinued, the accumulated gains and losses recognised directly in equity up to that date will remain in equity and be recognised in the income statement according to above-mentioned guidelines when the transaction occurs.

If the hedged transaction is no longer expected to take place, the accumulated unrealised gains or losses on the hedge instrument recognised directly in equity will be taken to equity immediately.

(iii) Hedging a net investment in a foreign operation (equity hedges)

Hedging a net investment in a foreign operation is recognised in the same way as a cash flow hedge. The gains or losses on the hedge instrument related to the effective part of the hedge that has been taken directly to equity as part of the translation differences will be recognised on the income statement upon disposing of the foreign operation.

Follow up of hedging effectiveness

Forward foreign exchange contracts are expected to be effective throughout the entire period. KONGSBERG uses rollovers of forward foreign exchange contracts from prognoses for project hedging upon the formation of contracts. Moreover, currency futures (project hedges) are rolled over in cases in which payments/ disbursements take place later than originally anticipated. KONGSBERG also uses bank accounts in foreign currency if payments occur prior to the due date, so that the exchange of foreign currency from the foreign currency account falls within the same period as any due date of the forward contract. Hedging effectiveness will therefore be high throughout the period.

k) Classification

Assets related to normal operating cycles or that fall due within 12 months are classified as current assets. Other assets are classified as non-current. Similarly, liabilities related to normal operating cycles or that fall due within 12 months are classified as current liabilities. Other liabilities are classified as non-current.

l) Inventories

Inventories are valued at the lowest of cost or net realisable value. The net realisable value of raw materials and work in progress is calculated as the sales value of the finished products less remaining production and sales costs. For finished goods, the net realisable value is calculated as the sales value less selling costs. For work in progress and finished products, the acquisition cost is calculated as direct and indirect costs. Inventories are assessed using the average acquisition cost.

m) Receivables

Accounts receivable and other receivables are recognised at their nominal values less any impairment. Accounts receivable in foreign currencies are recognised at the exchange rates on the balance sheet date.

n) Cash and short-term deposits

Cash includes cash-in-hand, bank deposits and short-term liquid investments that can be immediately converted to a given sum of money, with a maximal maturity of three months.

o) Equity

(i) Treasury shares

When buying back treasury shares, the acquisition price, including directly identifiable expenses, is recognised as a change in equity. Treasury shares are presented as a reduction in equity. Losses or gains on transactions involving treasury shares are not recognised on the income statement.

(ii) Costs related to equity transactions

Transaction costs directly linked to an equity transaction and to the cash effect on the equity transaction are recognised directly in equity less tax.

(iii) Reserve for change in fair value

The fund for valuation changes includes aggregate net changes in the fair value of financial instruments classified as cash flow hedges (hedge reserve) and financial instruments classified as available-for-sale (shares, fair value), until the investment is disposed of or it is ascertained that the investment has no value.

(iv) Translation differences

Translation differences are recognised directly to equity (translation reserve). When a foreign business is disposed of in whole or in part, the relevant translation reserve is recognised through profit or loss. See also Note 3 b) "Summary of significant accounting policies – Foreign currency".

p) Provisions

Provisions are recognised when the Group has an obligation as a result of past events, and when it is probable that there will be a financial settlement as a result of this obligation and the amount can be measured reliably. Generally speaking, provisions are based on historical data and a weighting of possible outcomes against the probability they will occur. If the time value is significant, the provision will be the net present value of the amount expected to be required to meet the obligation.

Guarantees

Provisions for guarantee costs are recognised when the underlying products or services are sold. Guarantee provisions are based on historical data on guarantees and a weighting of possible outcomes against the probability they will occur. Guarantee costs are expensed on an ongoing basis based on the degree of completion of the projects, and reclassified as provisions for guarantees upon delivery.

Restructuring

Provisions for restructuring are recognised when the Group has approved a detailed, formal restructuring plan, and restructuring has either started or been announced publicly and to the parties involved.

Onerous (loss-making) contracts

Provisions for onerous contracts are recognised when KONGSBERG's expected benefits from a contract are lower than the unavoidable expenses of meetings its obligations under the contract.

KONGSBERG has signed sale and leaseback agreements on several pieces of real estate. The Group carries no risk and enjoys no benefits related to the ownership of the buildings sold. The leasing situation is therefore considered to refer to operational leases. Rent is expensed on a straight-line basis over the term of the lease. In connection with the sale and leaseback, subleases were signed at a lower rent than indicated on the agreement. In addition, the Group has undertaken operational and maintenance responsibilities for subleased buildings. This net loss is considered an onerous contract under IAS 37, and the net current value of future losses is provided for in the accounts. The remaining provision is subject to annual review.

q) Employee benefits

Defined benefit pension plans

The Group's Norwegian companies have collective service pension schemes that entitle employees to certain future pension benefits in accordance with defined benefit plans. Pension benefits depend on the individual employee's number of years of service and salary level upon retirement age. There are also early retirement plans for some executives. To ensure uniform calculation of KONGSBERG's pension liabilities, all corporate entities have used the same actuary. In the income statement, the year's net pension expenses, after a deduction for the expected return on pension plan assets, have been recorded as "Personnel expenses". The balance sheet shows net pension liabilities incl. social security contributions. Changes in actuarial gains/losses on pension expenses for obligations and pension plan assets are recognised directly in equity. The financial and actuarial assumptions are subject to annual review. The discount rate is based on the long-term government bond interest rate, plus a supplement that reflects the duration of the pension liability.

Actuarial gains or losses attached to changes in the basis data, estimates and changes in assumptions are recognised directly in equity.

The Group's legal liability is not affected by the treatment of pensions in the accounts.

Defined contribution pension plans

In addition to the defined benefit plan described above, the Group's companies outside Norway and a few companies in Norway contribute to local pension plans. The premiums are expensed as they accrue.

Transition from a defined benefit plan to a defined contribution plan

In connection with the transition from a defined benefit plan to a defined contribution plan, a gain/loss was calculated on the share of the pension liability that was discontinued in connection with the settlement. The settlement was implemented on 31 Dec. 2007. Net pension liabilities related to the individuals who have switched to a defined contribution plan are estimated as their present value for each individual employee, based on the calculation assumptions at 31 Dec. 2007.

Share transactions with employees

For a number of years, the Group has been conducting a share programme for all employees, i.e. offering shares at a discount and with options attached to the shares if the employee owns them for more than two years. Discounts on the sale of shares, as well as on the value of the options, are calculated on the date of balance sheet recognition and expensed as personnel expenses. These options are for cash settlement, and the value of the options is measured at fair value. The fair value of the options is distributed over the period until the options are exercised, and recognised as a liability on the balance sheet. Liability is assessed for each period until the options are exercised, and recognised through profit or loss as personnel expenses.

r) Discontinued operations and non-current assets held for sale

A discontinued operation is a component of a Group business that represents a major part of the Group's business or a geographical area which has been disposed of or made available for sale. Classification as a discontinued operation occurs upon disposal or at an earlier point in time if the operation satisfies the criteria for being classified as being held for sale. When an operation is classified as a discontinued operation, the comparable figures are adjusted as though the operation had been discontinued/sold at the beginning of the period in question. The Group has chosen to present information about discontinued operations in Note 5 "Changes in Group structure".

s) Segments

Business segments

The Group is organised into two business areas: Kongsberg Defence & Aerospace and Kongsberg Maritime.

The business areas constitute the basis for primary reporting by segment. Transactions between segments are based on market terms. In segmental reports, transactions within the individual segments are eliminated. Further, intra-Group profits on sales between the various segments are eliminated.

Shareholder costs and certain overheads are not allocated to the segments. The same applies to taxes, cash and short-term deposits, interest-bearing debt and properties occupied by parties other than the Group's own units.

Geographical segments

The presentations of geographical segments break down segmental revenues based on the customers' geographical location.

Financial information on the business segments and the geographical segments is presented in Note 7 "Information by segment".

t) Earnings per share

The Group presents ordinary earnings per share and earnings per share after dilution. Ordinary earnings per share are calculated as the ratio between the net profit/(loss) for the year that accrues to the ordinary shareholders and the weighted average number of ordinary shares outstanding. The figure for diluted earnings per share is the result that accrues to the ordinary shareholders, and the number of weighted number of shares outstanding, adjusted for all diluting effects related to share options.

u) IFRS and IFRIC have been adopted by the EU/EEA but not yet implemented

IFRS and interpretations approved by EU/EEA up until 11 March 2008 and which were not mandatory at 31 December 2007, have not been applied by KONGSBERG. This applies to IFRS 8, revised IAS 23, new IAS 1, IFRIC 11, 12, 13 and 14. Based on the assessments made thus far, it is assumed that these standards and interpretation statements would have no material effect on the reported figures.

v) New IFRS and IFRIC adopted for use in the 2007 accounts

KONGSBERG has adopted IFRS 7, revised IAS 1, IFRIC 7, 8, 9 and 10 without material effect on the reported figures. However, the standards in IFRS 7 and revised IAS 1 have entailed a number of new disclosures in the notes.