Volvo 2007 Annual Report Download - page 127
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Please find page 127 of the 2007 Volvo annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report. Financial information 2007 123
Note 35 Fees to the auditors
Note 36 Goals and policies in fi nancial risk management
Audit fees 2006 2007
Audit fees to PricewaterhouseCoopers 130 109
Audit fees to other audit fi rms 1 3
Total 131 112
Other fees to PricewaterhouseCoopers
Fees for audit related services 20 97
Fees for tax services 14 12
Total 34 109
Fees and other remuneration to
external auditors total 165 221
Auditing assignments involve examination of the annual report and
fi nancial accounting and the administration by the Board and the
President, other tasks related to the duties of a company auditor and
consultation or other services that may result from observations noted
during such examination or implementation of such other tasks. All
other tasks are defi ned as other assignments.
Apart from derivatives, Volvo’s fi nancial instruments consist of bank
loans, fi nancial leasing contracts, accounts payable, accounts receiv-
able, shares and participations, as well as cash and short-term invest-
ments.
The primary risks deriving from the handling of fi nancial instru-
ments are interest-rate risk, currency risk, liquidity risk and credit risk.
All of these risks are handled in accordance with an established fi nan-
cial policy.
Interest-rate risk
Interest-rate risk refers to the risk that changed interest-rate levels will
affect consolidated earnings and cash fl ow (cash-fl ow risks) or the fair
value of fi nancial assets and liabilities (price risks). Matching the inter-
est-fi xing terms of fi nancial assets and liabilities reduces the expos-
ure. Interest-rate swaps are used to change/infl uence the interest-
fi xing term for the Group’s fi nancial assets and liabilities. Currency
interest-rate swaps permit borrowing in foreign currencies from differ-
ent markets without introducing currency risk. Volvo also has stand-
ardized interest-rate forward contracts (futures) and FRAs (forward-
rate agreements). Most of these contracts are used to hedge
interest-rate levels for short-term borrowing or investment.
Cash-fl ow risks
The effect of changed interest-rate levels on future currency and
interest-rate fl ows refers mainly to the Group’s customer fi nancing
operations and net fi nancial items. Within the customer fi nance oper-
ations the degree of matching interest-rate fi xing on borrowing and
lending is measured. The calculation of the matching degree excludes
equity, which in the customer fi nance operations amount to between
8 and 10%. According to the Group’s policy, the degree of matching
for interest-rate fi xing on borrowing and lending in the customer-fi -
nancing operations must exceed 80%. At year-end 2007, the degree
of such matching was 100% (100). A part of the short-term fi nancing
of the customer fi nancing operations is however pertaining to internal
loans from the industrial operations, why the matching ratio in the
Volvo group was slightly lower. At year-end 2007, in addition to the
assets in its customer-fi nancing operations, Volvo’s interest-bearing
assets consisted primarily of liquid assets invested in short-term inter-
est-bearing securities. The objective is to achieve an interest-fi xing
term of six months for the liquid assets in Volvo’s industrial operations
through the use of derivatives. On December 31, 2007, after taking
derivatives into account, the average interest on these assets was
4.4% (3.5). Apart from loans raised to fi nance the credit portfolio of
the customer-fi nancing operations, at this same point in time, Volvo’s
fi nancial liabilities consisted primarily of provisions for pensions and
similar commitments. After taking derivatives into account, outstand-
ing loans had interest terms corresponding to an interest-rate fi xing
term of six months and the average interest at year-end amounted to
4,5% (6.3).
Price risks
Exposure to price risks as result of changed interest-rate levels refers
to fi nancial assets and liabilities with a lower interest-rate fi xing term
(fi xed interest). A comparison of the reported values and the fair val-
ues of all of Volvo’s fi nancial assets and liabilities, as well as its deriva-
tives, is given in Note 37, Financial instruments. After the transition to
IFRS in 2005, the market values agree with the book values.
Assuming that the market interest rates for all currencies suddenly
rose by one percentage point (100 interest-rate points) over the inter-
est-rate level on December 31, 2007, over a 12-month period, all other
variables remaining unchanged, Volvo’s net interest income would be
favorably impacted by 108 (236). Assuming that the market interest
rates for all currencies fell in a similar manner by one percentage point
(100 interest-rate points), Volvo’s net interest income would be
adversely impacted by a corresponding amount.
The following table shows the effect on earnings in Volvo’s key cur-
rencies that would result is the interest-rate level were to change by
1 percentage point.
SEK M Effect on earnings
SEK 225
USD 10
EUR (116)
CAD (10)
JPY (121)
KRW 7
The above sensitivity analysis is based on assumptions that rarely
occur in reality. It is not unreasonable that market interest rates
change with 100 interest-rate points over a 12-month period. How-
ever, in reality, market interest rates usually do not rise or fall at one
point in time. Moreover, the sensitivity analysis also assumes a parallel
shift in the yield curve and an identical effect of changed market inter-
est rates on the interest-rates of both assets and liabilities. Conse-
quently, the effect of actual interest-rate changes may deviate from
the above analysis. Volvo uses derivatives to hedge currency and interest
rate risks.