Volvo 2007 Annual Report Download - page 93
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Please find page 93 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 89
Exchange rate gains and losses on payments during the year and on
the valuation of assets and liabilities in foreign currencies at year-end are
credited to, or charged against, income in the year they arise. The more
important exchange rates applied are shown in the table on page 88.
Net sales and revenue recognition
The Group’s reported net sales pertain mainly to revenues from sales
of goods and services. Net sales are reduced by the value of dis-
counts granted and by returns.
Income from the sale of goods is recognized when signifi cant risks
and rewards of ownership have been transferred to external parties,
normally when the goods are delivered to the customers. If, however,
the sale of goods is combined with a buy-back agreement or a residual
value guarantee, the sale is accounted for as an operating lease
transaction if signifi cant risks of the goods are retained in Volvo.
Income from the sale of workshop services is recognized when the
service is provided. Interest income in conjunction with fi nance leas-
ing or installment contracts are recognized during the underlying con-
tract period. Revenue for maintenance contracts are recognized
according to how costs associated with the contracts are distributed
during the contract period.
Interest income is recognized on a continuous basis and dividend
income when it is received.
Leasing – Volvo as the lessor
Leasing contracts are defi ned in two categories, operating and
fi nance lease, depending on the contract’s fi nancial implications.
Operating leasing contracts are reported as non-current assets in
Assets in operating leases. Income from operating leasing is reported
equally distributed over the leasing period. Straight-line depreciation
is applied to these assets in accordance with the terms of the under-
taking and the deprecation amount is adjusted to correspond to the
estimated realizable value when the undertaking expires. Assessed
impairments are charged to the income statement. The product’s
assessed realizable value at expiration of the undertaking is reviewed
continually on an individual basis.
Finance leasing agreements are reported as Non-current respect-
ive Short-term receivables in the customer fi nancing operations. Pay-
ments from fi nance leasing contracts are distributed between interest
income and amortization of the receivable in the customer fi nancing
operations.
In accordance with IAS 14, Segment reporting, operating leasing
contracts should be reclassifi ed to fi nance lease in the segment
reporting of Customer Finance if the residual value in these contracts
is guaranteed to Customer Finance by another Volvo business area. In
the Volvo Group’s consolidated balance sheet, these leasing agree-
ments are reported as operating leases. Reclassifi cation from operat-
ing to fi nancial leasing contract also affects the income statement
with regards to sales and depreciation. Customer Finance’s sales are
reduced as a result of the reclassifi cation as well as depreciation,
which affect cash fl ow from operating activities. However, the con-
solidated balance sheet and income statement still recognize leasing
contracts as operating and, accordingly, report higher sales and
depreciation compared to sales and depreciation reported within the
Customer Finance segment.
Investments in other companies
Volvo accounts for all investments in companies, except if these
investments are classifi ed as associated companies in accordance
with IAS 39, Financial Instruments: Recognition and Measurement.
Companies listed on a fi nancial exchange should be reported in the
balance sheet to market value. Under IAS 39, unrealized gains and
losses attributable to the change in market value of investments are
reported in a separate component of shareholders’ equity except
when the decline in value is signifi cant or other than temporary. If the
value decline is considered other than temporary, the value should be
written down through the income statement. Unlisted shares, for
which a reliable fair value can not be determined, should be reported
at acquisition cost reduced in appropriate cases by write-downs.
Reporting of fi nancial assets and liabilities
Volvo reports marketable securities in accordance with IAS 39 based
on classifi cation of these assets into a category valued at fair value
through profi t and loss. In accordance with IAS 39, Volvo derecog-
nizes fi nancial assets when substantially all risks and benefi ts of the
ownership of the fi nancial assets have been transferred to an external
party. The same principles are applied for fi nancial assets in the seg-
ment reporting.
Financial liabilities are reported at amortized cost. Transaction cost
in connection with raising fi nancial liabilities are amortized over the
fi nancial loan’s duration as a fi nancial expense.
Receivables
Accounts receivables are initially recognized at fair value, normally
equal to the nominal amount. In cases in which the payment terms
exceed one year, the receivable is carried at its discounted present
value. Provisions for doubtful receivables are made on a current basis
after an assessment of whether the customer’s ability to pay has
changed.
Hedge accounting
In accordance with IAS 39, certain fi nancial instruments shall be
reported at fair value in the balance sheet. In order to apply hedge
accounting, the following criteria must be met: the position being
hedged is identifi ed and exposed to market value movements, for
instance related to exchange-rate or interest-rate movements, the
purpose of the loan/instrument is to serve as a hedge and the hedg-
ing effectively protects the underlying position against changes in the
fair value. Financial instruments used for the purpose of hedging
future currency fl ows are accounted for as hedges if the currency
fl ows are considered highly probable to occur.
– For fi nancial instruments used to hedge forecasted internal com-
mercial cash fl ows and forecasted electricity consumption, the fair
value 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 are not met, the unrealized gain or
loss will be charged to the income statement. Gains and losses on
hedges are reported at the same time that the gains and losses arise
on the items hedged and are recognized in consolidated sharehold-
ers’ equity. Unrealized and realized gains and losses on hedges are
reported in operating income within Other operating income and
expenses.
– Under the more complex rules in IAS 39, Volvo has chosen to
apply hedge accounting for fi nancial instruments used to hedge inter-
est and currency risks on loans only for cases when hedge accounting
requirements are fulfi lled. For cases where hedge accounting is not
considered to be fulfi lled, unrealized gains and losses up until the
maturity date of the fi nancial instrument will be charged to the fi nan-
cial net in the income statement.