Volvo 2007 Annual Report Download - page 96
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Please find page 96 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.The Volvo Group
92 Financial information 2007
Notes to consolidated fi nancial statements
Note 2 Key sources of estimation uncertainty
Key sources of estimation uncertainty
Volvo’s signifi cant accounting principles are set out in note 1, Account-
ing Principles and conform to IFRS as adopted by the EU. The prepar-
ation of Volvo’s Consolidated Financial Statements requires the use of
estimates, judgements and assumptions that affect the reported
amounts of assets, liabilities and provisions at the date of the fi nancial
statements and the reported amounts of sales and expenses during
the periods presented. In preparing these fi nancial statements, Volvo’s
management has made its best estimates and judgements of certain
amounts included in the fi nancial statements, giving due consider-
ation to materiality. The application of these accounting principles
involves the exercise of judgement and use of assumptions as future
uncertainties and, as a result, actual results could differ from these
estimates. In accordance with IAS 1, preparers are required to provide
additional disclosure of accounting principles in which estimates,
judgments and assumptions are particularly sensitive and which, if
actual results are different, may have a material impact on the fi nan-
cial statements. The accounting principles applied by Volvo that are
deemed to meet these criteria are discussed below:
Impairment of goodwill, other intangible assets
and other non-current assets
Property, plant and equipment, intangible assets, other than goodwill,
and certain other non-current assets are amortized and depreciated
over their useful lives. Useful lives are based on management’s esti-
mates of the period that the assets will generate revenue. If, at the
date of the fi nancial statements, there is any indication that a tangible
or intangible non-current asset has been impaired, the recoverable
amount of the asset should be estimated. The recoverable amount is
the higher of the asset’s net selling price and its value in use, esti-
mated with reference to management’s projections of future cash
fl ows. If the recoverable amount of the asset is less than the carrying
amount, an impairment loss is recognized and the carrying amount of
the asset is reduced to the recoverable amount. Determination of the
recoverable amount is based upon management’s projections of
future cash fl ows, which are generally made by use of internal busi-
ness plans or forecasts. While management believes that estimates of
future cash fl ows are reasonable, different assumptions regarding
such cash fl ows could materially affect valuations. Intangible and
tangible non-current assets amounted to 106,220 (73,997) whereof
19,969 (8,849) represents goodwill. For Goodwill and certain other
intangible assets with indefi nite life-time an annual impairment review
is performed. Such an impairment review will require management to
determine the fair value of Volvo’s cash generating units, on the basis
of projected cash fl ows and internal business plans and forecasts.
Volvo has since 2002 performed a simliar impairment review. No
impairment charges were required for the period 2002 until 2007.
Residual value risks
In the course of its operations, Volvo is exposed to residual value risks
through operating lease agreements and sales combined with repur-
chase agreements. The products, primarily trucks, for which Volvo has
a residual value commitment, are generally recognized in the balance
sheet as assets under operating leases. Depreciation expenses for
these products are charged on a straight-line basis over the term of
the commitment in amounts required to reduce the value of the prod-
uct to its estimated net realizable value at the end of the commitment.
Estimated impairment losses are immediately charged to income. The
estimated net realizable value of the products at the end of the com-
mitments is monitored individually on a continuing basis. In monitoring
estimated net realizable value of each product under a residual value
commitment, management makes consideration of current price-level
of the used product model, value of options, mileage, condition, future
price deterioration due to expected change of market conditions,
alternative distribution channels, inventory lead-time, repair and
reconditioning costs, handling costs and overhead costs in the used
product divisions. Provisions for residual value risk amount to 670 (781).
Revenue recognition
Revenue 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 resid-
ual value guarantee, the sale is accounted for as an operating lease
transaction under the condition that signifi cant risks of the goods are
retained by Volvo. In certain cases Volvo enters into a buy-back agree-
ment or residual value guarantee after Volvo sold the product to an
independent party or in combination with an undertaking from the
customer that in the event of a buy-back to purchase a new Volvo
product. In such cases, there may be a question of judgement regard-
ing whether or not signifi cant risks and rewards of ownership have
been transferred to the customer. If it is determined that such an
assessment was incorrect, Volvo’s reported revenue and income for
the period will decline and instead be distributed over several report-
ing periods.
Deferred taxes
Under IFRS, deferred taxes are recognized for temporary differences,
which arise between the taxable value and reported value of assets
and liabilities as well as for unutilized tax-loss carryforwards. Volvo
records valuation allowances against deferred tax assets where man-
agement does not expect such assets to be realized based upon cur-
rent forecasts. In the event that actual results differ from these esti-
mates or management adjusts these estimates in future periods,
changes in the valuation allowance may need to be done that could