Volvo 2003 Annual Report Download - page 69

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67
Shareholders’ equity 2001 2002 2003
Shareholders’ equity in accordance with Swedish accounting principles 85,185 78,278 72,420
Items increasing (decreasing) reported shareholders’ equity
Derivative instruments and hedging activities (A) (1,584) 188 1,054
Business combinations (B) 4,125 5,219 5,788
Investments in debt and equity securities (C) (7,328) (9,813) (2,326)
Restructuring costs (D) – – –
Post-employment benefits (E) 272 (20) 1,658
Alecta surplus funds (F) (412) (2) –
Software development (G) 542 330 119
Product development (H) (1,962) (3,263) (3,568)
Entrance fees, aircraft engine programs (I) (719) (855) (874)
Other (J) 17 54 52
Income taxes on above US GAAP adjustments (K) 3,155 1,066 467
Net increase (decrease) in shareholders’ equity (3,894) (7,096) 2,370
Shareholders’ equity in accordance with US GAAP 81,291 71,182 74,790
Net income Shareholders’ equity
Accounting for derivative instruments and hedging activities 2001 2002 2003 2001 2002 2003
Derivatives Commercial exposure 342 1,814 417 (944) 870 1,287
Derivatives Financial exposure (685) 43 92 (685) (642) 315
Derivatives in fair value hedges 808 426 (36) 808 1,234 315
Fair value adjustment hedged items (765) (511) 36 (763) (1,274) (138)
Transition adjustment 2–––––
Basis adjustment on derecognised fair value hedges – – 373 – – (725)
Derivative instruments and hedging activities in
accordance with US GAAP (298) 1,772 882 (1,584) 188 1,054
B. Business combinations. Acquisitions of certain subsidiaries are
reported differently in accordance with Volvo’s accounting principles
and US GAAP. The differences are primarily attributable to reporting
and amortization of goodwill.
Effective in 2002, Volvo adopted SFAS 141 “Business
Combinations” and SFAS 142 “Goodwill and Other Intangible Assets”
in its determination of Net income and Shareholders’ equity in
accordance with US GAAP. In accordance with the transition rules of
SFAS 142, Volvo has identified its reporting units and determined
the carrying value and fair value of each reporting unit as of January
1, 2002. No impairment loss has been recognized as a result of the
transitional goodwill evaluation. In Volvo’s income statement for 2003
prepared in accordance with Swedish GAAP, amortization of goodwill
charged to income amounted to 873 (1,094). In accordance with
SFAS 142, goodwill and other intangible assets with indefinite useful
lives should not be amortized but rather evaluated for impairment
annually. Accordingly, the amortization of goodwill reported under
Swedish GAAP has been reversed in the determination of Net
income and Shareholders’ equity under US GAAP. Furthermore,
impairment tests have been performed for existing goodwill as of
December 31, 2003. No impairment loss has been recognized as a
result of these tests.
In 2003, Volvo Construction Equipment acquired assets associat-
ed with the L.B. Smith distribution business in the United States.
Under Swedish GAAP, this operation is classified as a temporary
investment and therefore not consolidated in the Volvo Group. Under
US GAAP, the acquired operations have been consolidated and
accruals have been made for intercompany profits in the year-end
inventory of the L.B. Smith business. Consolidation of the L.B. Smith
distribution business under US GAAP affected Volvo’s income after
financial items negatively with 138. The Group’s total assets
increased by SEK 1.1 billion.
Significant differences between Swedish and US accounting
principles
A . Derivative instruments and hedging activities. Volvo uses forward
exchange contracts and currency options to hedge the value of
future commercial flows of payments in foreign currency and com-
modity purchases. Under Swedish GAAP outstanding contracts that
are highly certain to be covered by forecasted transactions are not
assigned a value in the consolidated financial statements.
Under US GAAP Volvo does not apply hedge accounting for com-
mercial derivatives. Outstanding forward contracts and options are
valued at market rates, and unrealised gains or losses that thereby
arise are included when calculating income. Unrealized net gains for
2003 pertaining to forwards and options contracts are estimated at
1,287 (870; losses 944).
Volvo uses derivative instruments to hedge the value of the Group’s
financial position. In accordance with US GAAP, all outstanding deriv-
ative instruments are valued at fair value. The unrealised gains or
losses that thereby arise are included when calculating income. Only
part of the Group’s hedges of financial exposure qualifies for hedge
accounting under US GAAP and are accounted for as such. In fair
value hedges the derivatives are valued at fair value and the hedged
items are valued at fair value regarding the risk and period being
hedged and included when calculating income. In cash flow hedges
only the derivatives are valued at fair value and unrealised gains or
losses are included in shareholders equity (other comprehensive
income), and affect net income when the hedged transactions occur.