Volvo 1997 Annual Report Download - page 44

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the valuation of assets and liabilities in foreign currencies at year-end
are credited to, or charged against, income before taxes and minority
interests in the year they arise. The more important exchange rates
employed are shown above.
Other financial instruments
Interest-rate and currency-rate swaps are reported as hedging of
assets and liabilities.
Capital expenditures for property, plant and equipm ent
Capital expenditures for property, plant and equipment include
investments in buildings, machinery and equipment, as well as in
long-term intangible assets. Investments pertaining to assets under
operating leases are not included.
Depreciation and amortization of tangible and intangible
non-current assets
Depreciation is based on the historical cost of the assets, reduced in
appropriate cases by write-downs, and estimated economic life.
Capitalized type-specific tools are generally depreciated over 2 to 5
years. The depreciation period for assets under operating leases is
normally 3 to 5 years. Machinery is generally depreciated over 5 to
10 years, and buildings over 25 to 50 years, while the greater part of
land improvements are depreciated over 20 years. In connection with
its participation in aircraft engine projects with other companies,
Volvo Aero in certain cases compensates these companies for part of
the development costs incurred before Volvo Aero entered the pro-
ject. These costs are capitalized and depreciated over 5 to 10 years.
The difference between depreciation noted above and depreci-
ation allowable for tax purposes is reported by the parent company
and in the individual Group companies as accumulated extra depreci-
ation, which is included in untaxed reserves. Consolidated reporting
of these items is described below under the heading Allocations,
deferred tax liability, untaxed reserves.
Goodwill is included in intangible assets and amortized on a
straight-line basis over 5 to 20 years. The goodwill items pertaining
to Volvo Construction Equipment, Champion Road Machinery, The
AGES Group and Prévost are being amortized over 20 years due to
the holdings’ long-term and strategic importance.
Inventories
Inventories are posted at the lower of cost, in accordance with the
first-in, first-out method (FIFO), or net realizable value. Adequate
provision has been made for obsolescence.
Marketable securities
Marketable securities are valued at the lower of cost or market value
in accordance with the portfolio method.
Research and developm ent expenses and warranty
expenses
Research and development expenses are charged to income as incurred.
Estimated costs for product warranties are charged to cost of sales
when the products are sold.
Nonrecurring item s
Nonrecurring items are reported separately in the income statement.
They pertain mainly to income and expenses attributable to major
changes in the composition of the Group. To show the results of the
Volvo Group’s continuing operations, “Operating income before non-
recurring items” is also reported. This deviates from Recommendation
RR4 of the Swedish Financial Accounting Standards Council, which
states that such an income/ loss term is not compatible with the pre-
mise upon which the Recommendation is based.
Application of estim ated values
In preparing the year-end financial statements in accordance with
generally accepted accounting principles, company management
makes certain estimates and assumptions which affect the value of
assets and liabilities as well as contingent liabilities at the closing
date. Reported amounts for income and expenses in the reporting
period are also affected. The actual result may differ from these
estimates.
Allocations, deferred tax liability, untaxed reserves
Tax laws in Sweden and certain other countries allow companies to
defer payment of taxes through allocations to untaxed reserves.
The individual Group companies (including AB Volvo) report untax-
ed reserves as a separate balance sheet item. In the income state-
ments, allocations to and withdrawals from untaxed reserves are
reported under the heading Allocations. The reported tax expense is
based on income after allocations.
In the consolidated balance sheet, untaxed reserves are divided
into deferred tax liability in untaxed reserves, which is reported as
deferred taxes among Provisions, and Equity in untaxed reserves,
which is included in Restricted equity. The deferred tax liability in
untaxed reserves is calculated based on the anticipated tax rate for the
immediately following year in each country. Calculation of the amount
of tax liability takes into account that a portion of the untaxed reserves
may be withdrawn without tax consequences by utilizing tax-loss
carryforwards. Deferred tax receivables resulting from future tax-loss
carryforwards exceeding deferred tax liability are not reported.
No allocations to untaxed reserves are reported in the consolidated
statements of income. Group tax expense is calculated as the sum of
reported tax expense for each Group company, adjusted for the
effects of allocations to, and withdrawals from, untaxed reserves. This
adjustment corresponds to the annual change in the item deferred tax
liability in untaxed reserves included in Deferred taxes in the consoli-
dated balance sheet. Group tax expense is also affected by the
Group’s share of tax expenses in associated companies and by con-
solidated adjustments, primarily the elimination of internal profits. The
Group’s reported tax expense thereby becomes attributable mainly to
reported income after financial items.
Exchange rates Average rate Year-end rate
Country Currency 1995 1996 1997 1995 1996 1997
Belgium BEF 0.242 0.217 0.214 0.226 0.215 0.213
Denmark DKK 1.274 1.158 1.158 1.200 1.156 1.155
Finland FIM 1.636 1.463 1.476 1.529 1.482 1.453
France FRF 1.430 1.312 1.310 1.360 1.312 1.314
Italy ITL 0.00439 0.00436 0.0045 0.00421 0.00451 0.0045
Japan JPY 0.0765 0.0618 0.0631 0.0648 0.0593 0.0606
Netherlands NLG 4.447 3.982 3.921 4.150 3.941 3.903
Norway NOK 1.126 1.040 1.082 1.052 1.066 1.072
Great Britain GBP 11.281 10.486 12.496 10.330 11.605 13.123
Germany DEM 4.981 4.462 4.412 4.644 4.423 4.398
United States USD 7.140 6.712 7.629 6.672 6.872 7.870
Notes to Consolidated Financial Statements