Volvo 2007 Annual Report Download - page 97
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Please find page 97 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 93
materially impact our fi nancial position and the income for the period.
At December 31, 2007, a valuation allowance of 156 (213) was estab-
lished for the value of deferred tax assets. Net of this valuation allow-
ance, deferred tax assets net of 12,208 (10,069) were recognized in
the Group’s balance sheet.
Inventory obsolescence
Inventories are reported at the lower of cost, in accordance with the
fi rst-in, fi rst-out method (FIFO), and net realizable value. The esti-
mated net realizable value includes management consideration of
out-dated articles, over-stocking, physical damages, inventory-lead-
time, handling and other selling costs. If the estimated net realizable
value is lower than cost, a valuation allowance is established for inven-
tory obsolescence. The total inventory value, net from inventory obso-
lescence allowance, is per December 31, 2007, 43,645 (34,211).
Credit loss reserves
The establishment of credit loss reserves on customer fi nancing
receivables is dependent on estimates including assumptions regard-
ing past dues, repossession rates and the recovery rate on the under-
lying collateral. At December 31, 2007, the total credit loss reserves in
Volvo Financial Services amounted to 1.59% (2.01) of the total credit
portfolio within the Customer Finance segment.
Pensions and other post-employment benefi ts
Provisions and costs for post-employment benefi ts, i.e. mainly pen-
sions and health-care benefi ts, are dependent on assumptions used
by actuaries in calculating such amounts. The appropriate assump-
tions and actuarial calculations are made separately for each popula-
tion in the respective countries of Volvo’s operations. The assump-
tions include discount rates, health care cost trends rates, infl ation,
salary growth, long-term return on plan assets, retirement rates, mor-
tality rates and other factors. Discount rate assumptions are based on
long-term high quality corporate bond and government bond yields
available at year-end. Health care cost trend assumptions are devel-
oped based on historical cost data, the near-term outlook, and an
assessment of likely long-term trends. Infl ation assumptions are based
on an evaluation of external market indicators. The salary growth
assumptions refl ect the long-term actual experience, the near-term
outlook and assumed infl ation. Retirement and mortality rates are
based primarily on offi cially available mortality statistics. The actuarial
assumptions are revieved on an annual basis and modifi cations are
made to them when it is deemed appropriate to do so. Actual results
that differ from management’s assumptions are accumulated and
amortized over future periods and, therefore, generally affect the
recognized expense and recorded provisions in such future periods.
See Note 24 for more information regarding costs and assumptions
for post-employment benefi ts. At December 31, 2007 net provisions
for post-employment benefi ts amounted to 7,643 (6,651).
Product warranty costs
Estimated costs for product warranties are charged to cost of sales
when the products are sold. Estimated warranty costs include con-
tractual warranty and goodwill warranty (warranty cover in excess of
contractual warranty or campaigns which is accepted as a matter of
policy or normal practice in order to maintain a good business relation
with the customer). Warranty provisions are estimated with consider-
ation of historical claims statistics, the warranty period, the average
time-lag between faults occurring and claims to the company and
anticipated changes in quality indexes. Differences between actual
warranty claims and the estimated claims generally affect the recog-
nized expense and provisions in future periods. Refunds from sup-
pliers, that decrease Volvo’s warranty costs, are recognized to the
extent these are considered to be virtually certain. At December 31,
2007 warranty cost provisions amounted to 9,373 (8,411).
Legal proceedings
Volvo only recognizes liabilities in the accounts where Volvo has a
present obligation from a past event, a transfer of economic benefi ts
is probable and Volvo can make a reliable estimate of the size of the
amount. In instances such as these, a provision is calculated and rec-
ognized in the balance sheet. In instances where these criteria are not
met, a contingent liability may be disclosed in the notes to the
accounts. A contingent liability will be disclosed when a possible obli-
gation has arisen but its existence will only be confi rmed by future
events not wholly within Volvo’s control or in circumstances where an
obligating event has occurred but it is not possible to quantify the size
or likelihood of that obligation crystallizing. Realization of any contin-
gent liabilities not currently recognized or disclosed in the fi nancial
statements could have a material effect on Volvo’s fi nancial condition.
Volvo regularly reviews signifi cant outstanding legal cases following
developments in the legal proceedings in order to assess the need for
provisions in our fi nancial statements. Among the factors that Volvo
considers in making decisions on provisions are the nature of the liti-
gation, claim or assessment, the legal processes and potential level of
damages in the jurisdiction in which the litigation, claim or assessment
has been brought, the progress of the case (including progress after
the date of the fi nancial statements but before those statements are
issued), the opinions or views of legal counsel and other advisers,
experience in similar cases, and any decision of Volvo’s management
as to how Volvo intends to respond to the litigation, claim or assess-
ment. To the extent the determinations at any time do not refl ect sub-
sequent developments or the eventual outcome of any claim, our
future fi nancial statements may be materially affected, with an adverse
impact upon our results of operation, fi nancial position and liquidity.
Note 3 Transition to IFRS
Effective from 2005, all listed companies within the European Union
(EU) are required to prepare their consolidated fi nancial reporting in
accordance with the International Financial Reporting Standards (IFRS)
as adopted by the EU. In accordance with IFRS transition rules (IFRS 1)
Volvo appplies IFRS as of January 1, 2005 with retroactive application
from January 1, 2004. The impact of the transition to IFRS on Volvo
consolidated fi nancial reporting is described in Note 3 of the annual
reports 2005 and 2006.