Volvo 1997 Annual Report Download - page 58

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Significant differences between Swedish and U.S.
accounting principles
A. Foreign currency translation. When valuing outstanding forward
exchange contracts and currency options contracts, Volvo makes a
provision for unrealized losses to the extent that such losses exceed
unrealized gains. In calculating unrealized losses and gains, a portion of
the hedged amount is excluded for which there is great certainty that
the currency flow through commercial transactions will cover the con-
tracts. In accordance with U.S. GAAP, these forward exchange options
contracts are valued at market price through fictive closing. Gains and
losses arising therefrom are included in income. Unrealized losses net,
on forward and options contracts in 1997 were estimated at 1,163
(gain 3,660; gain 3,920).
B. Income taxes. Volvo applies the liability method of accounting for
income tax in accordance with U.S. GAAP, SFAS 109: Accounting for
income taxes. Under the liability method, deferred tax receivables and
liabilities are established for the temporary differences between the
financial reporting basis and the tax basis of Volvo’s assets and liabi-
lities at tax rates expected to be in effect when such amounts are
realized or settled.
The major difference between Swedish accounting principles and
U.S. GAAP is the principle for determining the valuation reserve. In
accordance with SFAS 109, deferred tax receivables are reported
when it is “more likely than not” that the receivable will be realized.
At December 31, 1997, the valuation reserve was 1,500 (1,400;
900) lower applying U.S. GAAP than in accordance with Swedish GAAP.
Specification of deferred tax
receivables and liabilities
(In accordance with Swedish GAAP) 1995 1996 1997
Deferred tax receivable:
Tax-loss carryforwards 1,290 1,640 1,582
Shares and participations 620 626 236
Investment deduction 26 106 103
Other (mainly temporary
differences) 2,136 2,905 3,838
4,072 5,277 5,759
Valuation reserve (1,757) (2,209) (2,578)
Deferred tax receivables after
deductions for valuation reserve 2,315 3,068 3,181
Deferred tax liabilities:
Temporary differences
(mainly untaxed reserves) 3,673 3,837 4,110
Other 1,232 1,098 1,214
4,905 4,935 5,324
Deferred tax liabilities, net 2,590 1,867 2,143
of which, long term 3,350 2,728 3,567
After taking into account offsetting possibilities the items above are
shown in Volvo’s balance sheet as follows:
1995 1996 1997
Other long-term receivables — 265 255
Other short-term receivables 760 923 1,514
Deferred taxes 3,350 3,055 3,912
Deferred tax liabilities, net 2,590 1,867 2,143
C. Tooling costs. Up to and including 1992 Volvo expensed all
tooling costs in the year incurred. In accordance with U.S. GAAP, all
significant tooling costs are capitalized and depreciated over a period
not exceeding five years, Effective in the 1993 accounts, Volvo has
applied this accounting method and is capitalizing type-specific
tools. Adjustments under this point pertain to depreciation of capitali-
zed tooling costs in accordance with U.S. GAAP prior to 1993.
D. Business combinations. There are differences between Swedish
reporting and U.S. GAAP in the method of accounting for certain
acquisitions, particularly in the recognition and amortization of excess
values and accounting for the tax benefits related to utilization of loss
carryforwards of acquired subsidiaries.
Volvo’s earnings in 1993 include a provision for an excess value
related to Volvo Trucks which resulted from the exchange of shares
with Renault. In accordance with U.S. GAAP, the corresponding
excess value should be reported as a fixed asset (goodwill) which is
being amortized over a period of five years.
In accordance with U.S. GAAP, the acquisition of BCP (Branded
Consumer Products AB (BCP) resulted in a gain, before taxes, of
1,320 in 1993. The gain was attributable to the exchange of
Pharmacia shares for BCP shares. The transaction is reported in
Volvo’s 1993 financial statements as an exchange of shares that did
not affect income.
In 1994 Volvo acquired the remaining outstanding BCP shares.
For U.S. GAAP purposes, an excess value (goodwill) of 5,280 was
recognized based on the fair value of Volvo shares exchanged for the
acquired BCP shares in June 1994. For Swedish GAAP purposes,
the acquisition resulted in a smaller excess value amounting to 2,500
based on the fair value of Volvo shares in October 1993. During
1995 Volvo sold some shares attributable to the BCP acquisition. Of
original goodwill of 5,280, approximately 20% was charged against
the capital gain.
All shareholdings attributable to the BCP acquisition were dives-
ted in 1996 through the distribution of Swedish Match.
In 1995 Volvo acquired the outstanding 50% of the shares of
Volvo Construction Equipment Corporation (formerly VME) from
Clark Equipment Company in the U.S. In connection with the acquisi-
tion, an excess value (goodwill) of SEK 2.8 billion was reported. The
shareholding was written down by SEK 1.8 billion, the portion of the
excess value estimated to be attributable to the Volvo brand name at
Notes to Consolidated Financial Statements
Net income Shareholders’ equity
Goodwill 1995 1996 1997 1995 1996 1997
Goodwill in accordance with
Swedish GAAP, December 31 (2,132) (195) (196) 5,431 2,163 3,075
Items affecting reporting of goodwill
Acquisition of shares in BCP (974) — — 2,988 — —
Volvo Truck with regard to exchange
of shares with Renault (438) (438) (438) 1,315 877 439
Acquisition of Volvo Construction
Equipment corporation 1,772 (91) (91) 1,772 1,681 1,590
Other (5) — — (5) — —
Net change in accordance with U.S. GAAP 355 (529) (529) 6,070 2,558 2,029
Approximate Goodwill in accordance
with U.S. GAAP, December 31 (1,777) (724) (725) 11,501 4,721 5,104