Volvo 2007 Annual Report Download - page 130
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126 Financial information 2007
Notes to consolidated fi nancial statements
Note 37 Financial instruments
The fi nancial assets treated within the framework of IAS 39 are clas-
sifi ed either as fi nancial assets at fair value through profi t and loss, as
claims under a loan and receivables, as investments held to maturity
or as available-for-sale fi nancial assets.
Transaction expenses are included in the asset’s fair value except
in cases in which the change in value is recognized in the income
statement. The transaction costs arising in conjunction with assuming
fi nancial liabilities are amortized over the term of the loan as a fi nan-
cial cost. Embedded derivatives are detached from the related main
contract, if applicable. Contracts containing embedded derivatives are
valued at fair value in the income statement if the contracts inherent
risk and other characteristics indicate a close relation to the embed-
ded derivative. Classifi cations made of fi nancial instruments are evalu-
ated each quarter and, if necessary, the classifi cation is adjusted.
Purchases and sales of fi nancial assets and liabilities are recog-
nized on the transaction date. A fi nancial asset is derecognized (extin-
guished) in the balance sheet when all signifi cant risks and benefi ts
linked to the asset have been transferred to a third party.
The fair value of assets is determined based on the market prices
in such cases they exist. If market prices are unavailable, the fair value
is determined for each asset using various valuation techniques.
Financial assets at fair value through profi t and loss
A fi nancial asset recognized at fair value in the income statement is
categorized as follows: Either (1) it is recognized with the fi nancial
instruments or in accordance with (2) the so-called fair value option
on initial recognition has been designated as such. For the fi rst cat-
egory to apply, it is required that the asset is acquired with the main
purpose of being sold in the near future and that it is part of a port-
folio and there is a proven pattern of short-term capitalization of gains.
All of Volvo’s fi nancial assts that are recognized at fair value in the
income statement are in category 1.
Derivatives, included embedded derivatives detached from the host
contract, are classifi ed as held-for-trading if the are part of an evi-
dently effective hedge accounting or are a fi nancial guarantee. Gains
and losses on these assets are recognized in the income statement.
A fi nancial contract containing one or more embedded derivatives
is classifi ed in its entirety as a fi nancial asset whose value change is
recognized in the income statement if not the embedded derivative
does not affect future cash fl ow attributable to the fi nancial asset or
separation of the embedded instrument is required.
Short-term investments are valued at fair value and the changes in
this value are recognized in the income statement. Short-term invest-
ments that mainly consist of interest-bearing fi nancial instruments are
reported in Note 21.
Volvo classifi es fi nancial derivatives as fi nancial assets whose value
changes are reported in the income statements if they evidently are
not used in hedge accounting. All derivatives are reported in this note
below.
Financial assets held to maturity
Held-to-maturity investments are assets with fi xed payments and
term and that Volvo intends and is able to hold to maturity. After initial
valuation, these assets are valued at accrued acquisition value in
accordance with the effective interest method, with adjustment for
any impairment. Gains and losses are recognized in the income state-
ment when assets are divested or impaired as well as in pace with the
accrued interested being reported. At year end 2007 Volvo did not
have any fi nancial instruments classifi ed in this category.
Loan receivables and other receivables
Loans and receivables are non-derivative fi nancial assets with fi xed or
determinable payments, originated or acquired, that are not quoted in
an active market. After initial recognition, loans and receivables are
valued at accrued acquisition value in accordance with the effective
interest method. Gains and losses are recognized in the income state-
ment when the loans or receivables are divested or impaired as well
as in pace with the accrued interested being reported.
Accounts receivables are recognized initially at fair value, which
normally corresponds to the nominal value. In the event that the pay-
ment terms exceed one year, the receivable is recognized at the dis-
counted present value. Provisions for doubtful receivables are made
continuously after assessment of whether the customer’s payment
capacity has changed.
Volvo reports different loans and receivables. Note 16, Long-term
receivables in customer fi nancing operations presents mainly receiva-
bles related to installment purchases and fi nance leasing. Note 17,
Other long-term receivable, presents, among other items, Other loans
to external parties. Note 19, Current receivables in customer fi nan-
cing operations, presents installment purchases, fi nance leasing and
dealer fi nancing and Note 20, Other current receivables, is mainly
accounts receivable.
Available-for-sale assets
This category includes assets available for sales or those that have
not been classifi ed in any of the other three categories. These assets
are initially measured at fair value. Fair value changes are recognized
directly in shareholders’ equity. The cumulative gain or loss that was
recognized in equity is recognized in profi t or loss when an available-
for-sale fi nancial asset is sold. Unrealized value declines are recog-
nized in equity, if the decline is not considered temporary. If the value
decline is signifi cant and has lasted for a longer period, the value
impairment is recognized in the income statement. If the event caus-
ing the impairment no longer exists, impairment can be reversed in the
income statement if it does not involve an equity instrument.
Earned or paid interest attributable to these assets is recognized in
the income statement as part of net fi nancial items in accordance with
the effective interest method. Dividends received attributable to these
assts are recognized in the income statement as Earnings from other
shares and participations.
Volvo reports shares and participations in listed companies at mar-
ket value on the balance-sheet date, with the exception of investments
classed as associated companies and joint ventures. Companies
listed on fi nancial marketplaces are reported at market value on the
balance-sheet date. Holdings in unlisted companies for which a mar-
ket value is unavailable, are recognized at acquisition value. Volvo
classifi es these types of investments as assets available for sale. Note
15 Shares and participations lists Volvo’s holdings of shares and par-
ticipations in listed companies.
Impairments
Financial assets at fair value through profi t and loss
Impairments do not need to be reported for this category of assets
since they are continuously revalued at their fair value in the income
statement.