Volvo 2007 Annual Report Download - page 94
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90 Financial information 2007
Notes to consolidated fi nancial statements
– Volvo applies hedge accounting for certain net investments in
foreign operations. The current result for such hedges is reported in a
separate component in shareholders’ equity. In the event of a divest-
ment, the accumulated result from the hedge is recognized in the
income statement.
See Note 37 for further description of accounting principles regard-
ing fi nancial assets and liabilities.
Research and development expenses
Volvo applies IAS 38, Intangible Assets, for reporting of research and
development expenses. In accordance with with this standard, expen-
ditures for development of new products, production systems and
software shall be reported as intangible assets if such expenditures
with a high degree of certainty will result in future fi nancial benefi ts
for the company. The acquisition value for such intangible assets shall
be amortized over the estimated useful life of the assets. In order for
these development expenditures to be reported as assets, a number
of criteria must be met. For example, it must be possible to prove the
technical functionality of a new product or software prior to its devel-
opment being reported as an asset. In normal cases, this means that
expenditures are capitalized only during the industrialization phase of
a product development project. Other research and development
expenses are charged to income as incurred.
Depreciation, amortization and impairments of tangible and
intangible non-current assets
Volvo applies acquisition values for valuation of intangible and tangible
assets. Loan expenses during the acquisition period for a non-current
asset are expense. Depreciation is based on the acquisition value of
the assets, adjusted in appropriate cases by write-downs, and esti-
mated useful lives.
Depreciation periods
Capitalized type-specifi c tools 2 to 8 years
Operational leases 3 to 5 years
Machinery 5 to 20 years
Buildings and Investment property 25 to 50 years
Land improvements 20 years
Trademarks 20 years
Distribution networks 10 years
Product and software development 3 to 8 years
In connection with its participation in aircraft engine projects with
other companies, Volvo Aero in certain cases pays an entrance fee.
These entrance fees are capitalized as an intangible asset. From May
1, 2007, Volvo has adjusted the depreciation period to the estimated
useful life, which is estimated to be 20 years. The effect of the change
in estimate is a positive SEK 56 M for the fi scal year 2007. Volvo
capitalizes in a corresponding way certain costs for the participation
in other industrial cooperation projects.
Information regarding estimated value of investment property is
based on discounted cash fl ow projections. The estimation is per-
formed by the Group’s Real Estate business unit. The required return
is based on current property market conditions for comparable prop-
erties in comparable locations.
Goodwill is reported as intangible non-current assets with indefi n-
ite useful life. Annually, testing is carried out to determine any impair-
ment through calculation of the asset’s recovery value. If the calcu-
lated recovery value is less than the carrying value, a write down is
made to the asset’s recovery value.
Similarly, impairment testing is carried out at the closing date if
there is any indication that a non-current asset has declined in value.
Leasing – Volvo as the lessee
Volvo evaluates leasing contracts in accordance with IAS 17, Leases.
In those cases in which the fi nancial risk and benefi ts that are related
to ownership are substantially held by Volvo, so called fi nance leases,
Volvo reports the asset and related obligation in the balance sheet at
the lower of the leased asset’s fair value or the present value of mini-
mum lease payments. The future leasing fees are reported as loans.
The lease asset is depreciated in accordance with Volvo’s policy for
the respective non-current asset. The lease payments when made are
allocated between amortization and interest expenses. If the leasing
contract is considered to be a so called operational lease the income
statement is charged over the lease contract’s lifetime.
Non-current assets held for sale and discontinued operations
Volvo applies IFRS 5, Non-current Assets Held for Sale and Discon-
tinued Operations as of 2005. Processes are continuously ongoing
regarding the sale of assets or groups of assets at minor values. In
cases in which the criteria for being classifi ed as a non-current asset
held for sale are fulfi lled and the asset or group of assets is other than
of minor value, the asset or group of assets and the related liabilities
are reported on a separate line in the balance sheet. The asset or
group of assets are tested for impairment and, if impaired valued at
fair value after deduction for selling expenses.
Inventories
Inventories are stated at the lower of cost, in accordance with the
fi rst-in, fi rst-out method (FIFO), or net realizable value. The acquisition
value is based on the standard cost method, including costs for all
direct manufacturing expenses and the apportionable share of the
capacity and other related manufacturing costs. The standard costs are
tested regularly and adjustment is made based on current conditions.
Costs for research and development, selling, administration and fi nan-
cial expenses are not included. Net realizable value is calculated as
the selling price less costs attributable to the sale.
Share-based payments
Volvo applies IFRS 2, Share-based Payments for share-based incen-
tive programs. IFRS 2 distinguishes “cash-settled” and “equity-set-
tled”, in Volvo case, shares, components of share-based payments.
The Volvo program include both a cash-settled and an equity-settled
part. The value of the equity-settled payments is determined at the
grant-date, recognized as an expense during the vesting period and
credited to equity. The fair value is calculated according to share price
reduced by dividend connected to the share before the allotment. The
additional social costs are reported as a liability, revalued at each bal-
ance sheet date in accordance with URA 46, issued by the Swedish
Financial Accounting Standards Council’s Emergency Issue Task
Force. The cash-settled payment is revalued at each balance sheet
day and is reported as an expense during the vesting period and as a
short term liability. An assessment whether the terms for allotment will
be fulfi lled is made continuously. If the assessment changes, the
expense will be adjusted. The equity-settled part was earlier accounted