Volvo 1999 Annual Report Download - page 60

The Volvo Group
58
Accounting for hedges
Loans and other financial instruments used to hedge an
underlying position are reported as a hedge. In order to
apply hedge accounting, the following criteria must be
met: the position being hedged is identified and exposed
to exchange-rate or interest-rate movements, the purpose
of the loan/ instrument is to serve as a hedge and that
the hedging effectively protects the underlying position
against changes in the market rates. Financial instru-
ments used for the purpose of hedging future currency
flows are accounted for as hedges if the currency flows
are considered probable to occur.
Foreign currencies
In preparing the consolidated financial statements, all
items in the income statements of foreign subsidiaries
(except subsidiaries in highly inflationary economies) are
translated to Swedish kronor at the average exchange
rates during the year (average rate). All balance sheet
items except net income are translated at exchange rates
at the respective year-ends (year-end rate). The differ-
ences in consolidated shareholders’ equity arising as a
result of variations between year-end exchange rates are
charged or credited directly to shareholders’ equity and
classified as restricted or unrestricted reserves. The dif-
ference arising in the consolidated balance sheet as
a result of the translation of net income, in the income
statements, in foreign subsidiaries’ to Swedish kronor at
average rates, and in the balance sheets at year-end
rate, is charged or credited to unrestricted reserves.
Movements in exchange rates change the book value of
foreign associated companies. This difference affects
restricted reserves directly.
When foreign subsidiaries and associated companies
are divested, the accumulated translation difference is
reported as a realized gain/ loss and, accordingly, affects
the capital gain.
Financial statements of subsidiaries operating in highly
inflationary economies are translated to Swedish kronor
using the monetary method. Monetary items in the
balance sheet are translated at year-end rates and non-
monetary balance sheet items and corresponding in-
come statement items are translated at rates in effect at
the time of acquisition (historical rates). Other income
statement items are translated at average rates.
Translation differences are credited to, or charged
against, income in the year in which they arise.
In the individual Group companies as well as in the
consolidated accounts, receivables and liabilities in
foreign currency are valued at year-end exchange rates.
In appropriate cases, hedged receivables and liabilities
are valued at the underlying forward rate.
Gains and losses pertaining to hedges are reported at
the same time as gains and losses of the items hedged.
Received premiums or payments for currency options,
which hedge currency flows in business transactions are
reported as income/ expense during the contract period.
Gains/ losses on outstanding currency futures at year-
end, which were entered into to hedge future commercial
currency flows, are reported at the same time as the
commercial flow is realized. For other currency futures
outstanding, a valuation is made whereby a provision for
unrealized losses is made to the extent they exceed
unrealized gains.
In valuing financial assets and liabilities whose original
currency denomination has been changed as a result of
currency swap contracts, the loan amount is accounted
for translated to Swedish kronor taking into account the
swap contracts.
Exchange differences on loans and other financial
instruments in foreign currency, which are used to hedge
net assets in foreign subsidiaries and associated com-
panies, are offset against translation differences in the
shareholders’ equity of the respective companies.
Exchange gains and losses on payments during the
year and on the valuation of assets and liabilities in
foreign currencies at year-end are credited to, or charg-
ed 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 and currency rate swaps are used to change the
underlying financial assets and debts structure and are
reported as hedges against such assets and debts.
Interest-rate instruments used as part of the manage-
ment of the Group’s short-term investments are valued
together with these instruments in accordance with the
portfolio method. Provisions are made for unrealized los-
ses in excess of the unrealized gains within the portfolio.
Interest-rate instruments that do not fullfil the criteria of
hedge accounting are valued at the balance sheet date at
which time provisions for unrealized losses are made.
Exchange rates Average rate Jan-Dec Year-end rate
Country Currency 1997 1998 1999 1997 1998 1999
Belgium BEF 0.214 0.2196 0.2187 0.213 0.2341 0.2123
Denmark DKK 1.158 1.1897 1.1864 1.155 1.2685 1.1505
Finland FIM 1.476 1.4930 1.4838 1.453 1.5885 1.4403
France FRF 1.310 1.3514 1.3450 1.314 1.4400 1.3055
Italy ITL 0.0045 0.0046 0.0046 0.0045 0.0049 0.0044
Japan JPY 0.0631 0.0610 0.0731 0.0606 0.0700 0.0835
The Netherlands NLG 3.921 4.0202 4.0034 3.903 4.2865 3.8859
Norway NOK 1.082 1.052 1.060 1.072 1.073 1.061
Great Britain GBP 12.496 13.2215 13.3834 13.123 13.5200 13.7950
Germany DEM 4.412 4.5317 4.5108 4.398 4.8295 4.3784
United States USD 7.629 7.9676 8.2742 7.870 8.0650 8.5250