Volvo 2006 Annual Report Download - page 114

110 Financial information 2006
The Volvo Group
Note 12 Income taxes
Income taxes were distributed as follows:
2004 2005 2006
Current taxes relating to the period (1,854) (2,568) (4,559)
Adjustment of current taxes for
prior periods 288 147 176
Deferred taxes originated or
reversed during the period (1,662) (2,933) (2,116)
Recognition and derecognition of
deferred tax assets 99 446 2,518
Total income taxes (3,129) (4,908) (3,981)
Provisions have been made for estimated tax charges that may arise
as a result of prior tax audits in the Volvo Group. Volvo evaluates tax
processes on a regular basis and makes provisions for possible out-
come when it is probable that Vovo will have to pay more taxes and
when it is possible to make a reasonably assessment of the possible
outcome. Tax claims for which no provision has been deemed neces-
sary of approximately 983 (695; 1,433) were reported as contingent
liabilities.
Deferred taxes relate to income taxes payable or recoverable in
future periods in respect of taxable temporary differences, deduct-
ible temporary differences, unused tax loss carryforwards or unused
tax credit carryforwards. Deferred tax assets are recognized to the
extent that it is probable that the amount can be utilized against
future taxable income. At December 31, 2006, the valuation allow-
ance attributable to deductible temporary differences, unused tax
loss carryforwards and unused tax credit carryforwards for which no
deferred tax asset was recognized amounted to 213 (2,972; 2,592).
Deferred taxes of 265 (negative 129; -) have at December 31,
2006, been accounted for as a direct reduction of equity. It is related
to fair value of derivative instruments
At year-end 2006, the Group had unused tax loss carryforwards
of about 5,900 (6,100; 10,100). These loss carryforwards expire
according to the table below.
Due date 2004 2005 2006
Within 1 year 200 400 500
Within 2 years 700 500 100
Within 3 years 600 100 100
Within 4 years 300 300 0
Within 5 years 200 100 200
After 6 years 8,100 4,700 5,000
Total 10,100 6,100 5,900
The Swedish corporate income tax rate is 28%. The table below
shows the principal reasons for the difference between this rate and
the Group’s tax rate, based on income after fi nancial items.
2004, % 2005, % 2006, %
Swedish corporate income tax rates 28 28 28
Difference in tax rate in various countries 3 3 2
Capital gains (3) (1) 0
Other non-taxable income (3) (1) (1)
Other non-deductible expenses 2 1 4
Adjustment of current taxes for prior years (2) (1) (1)
Recognition and derecognition of
deferred tax assets (1) (2) (12)
Other, net 0 0 0
Income tax rate for the Group 24 27 20
Reversal of reserve for deferred tax receivables
During the third quarter, AB Volvo decided to reverse a valuation
reserve for deferred tax receivables in the Mack Trucks subsidiary.
The decision was based on the fact that Volvo assesses that the
company has a long-term higher profi tability. Reporting of the
deferred tax receivables reduced tax expenses in the income state-
ment in the third quarter by 2,048. In accordance with prevailing
accounting rules, Volvo adjusted goodwill by 1,712, which affected
operating income adversely. The combined earnings effect for the
third quarter was a positive 336.
Most of the valuation reserve for deferred tax receivables that was
reported in Mack Trucks was attributable to the time of the acquisi-
tion of Renault Trucks and Mack Trucks. In accordance with IAS 12,
a reversal of valuation reserves attributable to an acquisition was
adjusted against the earlier reported goodwill. In an acquisition, the
acquired company’s assets and liabilities are valued at fair value. In
the case that the purchase consideration exceeds the revalued net
assets, goodwill is reported. Normally, a so-called acquisition bal-
ance sheet is preliminary for 12 months during which period it may
be changed in the case that another assessment is made in the net
value of the assets. If a change occurs, a corresponding adjustment
is made in goodwill. Changed assessments arising later are adjusted
in the income statement but do not affect the goodwill value. An
exception to this main rule is the case that a valuation reserve has
been reported for deferred tax receivables. If such a valuation
reserve is reversed at a later date, regardless of when in time, such
a reversal shall be reported as if the deferred tax receivables value
was reported at the time of the acquisition and that this value was
included in the acquired company’s net assets. Consequently, this
affects the original goodwill calculation. This means that in the item
Other operating income and expenses, Volvo has reported an
expense in the truck operations for the third quarter for adjustment
of goodwill of 1,712. The Volvo Group’s earnings for the period were
affected positively by 336.
Specifi cation of deferred tax assets
and tax liabilities 2004 2005 2006
Deferred tax assets:
Unused tax loss carryforwards 3,223 2,125 1,935
Other unused tax credits 259 295 248
Intercompany profi t in inventories 294 544 526
Valuation allowance for doubtful
receivables 587 644 463
Provisions for warranties 966 1,449 1,357
Provision for residual value risks 544 576 398
Provisions for
post-employment benefi ts 4,366 4,541 2,701
Provisions for restructuring
measures 220 120 17
Fair value of derivative instruments:
Change of hedge reserves – 224 3
Other deductible temporary
differences 2,347 2,670 2,634
Deferred tax assets before
deduction for valuation
allowance 12,806 13,188 10,282
Valuation allowance (2,592) (2,972) (213)
Deferred tax assets after
deduction for valuation
allowance 10,214 10,216 10,069
Notes to consolidated financial statements