Volvo 2006 Annual Report Download - page 141

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Financial information 2006 137
Hedge accounting
Cash-fl ow hedging
Derivative fi n ancial instruments used for hedging of forecasted com-
mercial cash-fl ows and electricity consumption have, in accordance
with IAS 39, been reported at fair value, which is debited or credited
to a separate component of equity to the extent the requirements for
cash-fl ow hedge accounting are fulfi lled. To the extent that the
requirements for hedge accounting are not met, any changes in
value attributable to derivatives are immediately charged to the
income statement. Gains and losses related to hedges are reported
at the same time as the gains and losses on the items that are
hedged effect the Group’s consolidated shareholders’ equity. The
table in Note 23, Shareholders’ Equity shows how the currency risk
reserve has changed during the year.
The Volvo Group’s outstanding forward contracts and options contracts for hedging of commercial currency risks
Other Fair
Currencies currencies value
Millions USD GBP EUR Net SEK
Due date 2007 amount 1,748 253 790 5,944
Due date 2008 amount 184 – – –
Due date 2009 amount 51 – – –
Total 1,983 253 790 5,944
Average contract rate 7.29 13.43 9.15
Fair value of
outstanding forward contracts 598 7 39 120 764
The hedged amount of projected future fl o ws for all periods are
within the framework of Volvo’s currency policy.
Volvo tests all cash-fl ow hedges for effectiveness when they are
entered into. Hedging is considered to be effective when the pro-
jected future cash fl ow’s currency fl u ctuation and maturity date coin-
cide with those of the hedging instrument. The hedging relationship
is regularly tested up until its maturity date. If the identifi ed relation-
ships are no longer deemed effective, the currency fl u ctuations on
the hedging instrument from the last period the instrument was con-
cidered effective are reported in the Group’s income statement. For
2006, Volvo reported 10 (neg. 3) in revenue related to the ineffec-
tiveness of cash-fl ow hedging.
Hedging of forecasted electricity is considered to be effective
when predetermined factors that affect electricity prices are in
agreement with forecasts of future electricity consumption and des-
ignated derivative instruments. No ineffective hedging of forecasted
electricity consumption was identifi ed during 2006.
Hedging of currency and interest rate risks on loans
In regards to derivative fi n ancial instruments used to hedge currency
and interest rate risks on loans, Volvo has chosen, under the more
complex rules in IAS 39, to not utilize hedge accounting. Unrealized
profi ts and losses through the maturity date of the fi n ancial instru-
ments have been charged to net fi nancial income for these derivatives.
Hedging of net investments in foreign operations
Volvo applies hedge accounting for certain net investments in
foreign operations. Current earnings from such hedging shall be
accounted for in a separate item within shareholders’ equity. A total
of 63 in shareholders’ equity relating to hedging of net investments
in foreign operations was reported in 2006. An amount of 37 was
reported in earnings relating to concluded hedges.