Volvo 2007 Annual Report Download - page 131
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Please find page 131 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 127
Assets that are valued at amortized cost
Volvo conducts routine controls to ensure that the carrying value of
assets valued at amortized cost, such as loans and receivables, has
not decreased, which would result in an impairment loss reported in
the income statement. Impairments consist of the difference between
carrying value and current value of the estimated future payment fl ow
attributable to the specifi c asset. Discounting of future cash-fl ow is
based on the effective rate used initially.
Initially, the impairment requirement shall be evaluated for each
respective asset. If, based on objective grounds, it cannot be deter-
mined that one or more assets are subject to an impairment loss, the
assets are grouped in units based, for example, on similar credit risks
to evaluate the impairment loss requirement collectively. Individually
written down assets or assets written down during previous periods
are not included when grouping assets for impairment test.
If the conditions for a completed impairment loss later prove to no
longer be present, and that can be related to a specifi c event after the
impairment event, the impairment loss is reversed in the income state-
ment as long as the carrying value does not exceed the amortized
cost at the time of the reversal.
When regard to accounts receivable, provisions shall be made when
there is objective evidence that Volvo will not receive the full value of
the receivable. They are excluded only when the receivable is deemed
to be worthless and will not be obtained.
Assets available for sale
If an asset available for sale is to be impaired, it shall be effected by
taking the difference between the asset’s acquisition value (adjusted
for any accrued interest if it involves that type of asset) and its fair
value. If it instead involves equity instruments such as shares, a com-
pleted impairment shall not be reversed in the income statement. On
the other hand, impairments that have been made on debt instruments
(interest-bearing instruments) shall in whole or part be reversed in the
income statement, in those instances where an event that is proven to
have occurred after the impairment was performed is identifi ed and
impacts the valuation of that asset.
Hedge Accounting
Volvo uses derivative fi nancial instruments, such as foreign exchange
derivative contracts, forwards and futures and interest-rate swaps, for
hedging against interest-rate risks and currency-rate risks. Deriva-
tives are initially valued at their fair value and revalued on subsequent
occasions at their fair value in the income statement, if it can be
proven that they have not been included in an effective hedging situ-
ation. Derivatives are accounted for as an asset when they have a
positive value and as a liability when they have a negative value. Profi ts
and losses on derivatives that do not fulfi ll the requirements for hedge
accounting are reported in the income statement. For 2007, 20 (10)
was accounted for in the statement regarding ineffective cash-fl ow
hedging. The following types of hedges can be utilized:
• A fair value hedge is used to hedge against exposure to changes in
fair value of a recognized asset or liability or a previously unrecog-
nized fi rm commitment.
• A cash-fl ow hedge is used to hedge against exposure to variability in
cash-fl ows that is attributable to a particular risk associated with a
recognized asset or liability or a highly probable forecast transaction
in regards to a previously unrecognized fi rm commitment.
• A hedge of a net investment in a foreign operation.
In order for hedge accounting to be used, a number of criteria must
be met: the position to be hedged shall be identifi ed and exposed to
currency and interest rate fl uctuations, the purpose of the loan/instru-
ment shall be to perform a hedge, and the hedge shall effectively
protect the underlying position against changes in its value. Financial
instruments utilized for the purpose of protecting future cash-fl ows
shall be considered a hedge if the fl ow is deemed very likely to occur.
In order to apply hedge accounting in accordance with IAS 39,
hedge effectiveness must be within a range of 80% to 125%. When
it comes to cash-fl ow hedging, the effective portion of the hedge is
reported against shareholders’ equity and the ineffectiveness against
the income statement.
Financial instruments used for hedging of forecast commercial
cash-fl ows and electricity consumption have 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. The fair value of derivatives is determined primarily by their
market value. To the extent that the requirements for hedge account-
ing 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.
Volvo also applies hedge accounting for certain net investments in
foreign operations. Current earnings from such hedging are reported
in a separate portion of shareholders’ equity. At divestment, the accu-
mulated earnings from the hedge are recognized in the income statement.