Volvo 2008 Annual Report Download - page 129

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125
Financial information 2008
The Volvo Group’s outstanding forward contracts and options contracts for hedging of commercial currency risks
Currencies
Other
currencies Fair value
Million USD GBP EUR JPY Net SEK
Due date 2009 amount 1,754 185 888 (7,030) 5,944
Due date 2010 amount (12) (12) (4) – 347
Due date 2011 amount (7) (4) – – 0
Total 1,735 169 884 (7,030) 6,291
Average contract rate 6.69 11.97 9.48 0.07
Fair value of outstanding forward contracts (1,460) 55 (1,191) 131 (471) (2,936)
The hedged amount of projected future fl ows for all periods are within
the framework of Volvo’s currency policy.
Volvo tests all cash-fl ow hedges for effectiveness when they are
entered into. Hedging is considered to be effective when the pro-
jected future cash fl ow’s currency fl uctuation and maturity date coin-
cide with those of the hedging instrument. The hedging relationship is
regularly tested up until its maturity date. If the identifi ed relationships
are no longer deemed effective, the currency fl uctuations on the
hedging instrument from the last period the instrument was con-
cidered effective are reported in the Group’s income statement. For
2008, Volvo reported 22 (20) in revenue related to the ineffective-
ness of cash-fl ow hedging. Hedging of forecasted electricity is con-
sidered to be effective when predetermined factors that affect elec-
tricity prices are in agreement with forecasts of future electricity
consumption and designated derivative instruments. The hedging
relationship is regularly tested up until its maturity date. If the identi-
fi ed relationships are no longer deemed effective, the currency fl uc-
tuations on the hedging instrument from the last period the instru-
ment was concidered effective are reported in the group´s income
statement. For 2008, Volvo reported 1 (0) related to the ineffectiv-
ness of the heding of forecasted electricity consumption.
Hedging of currency and interest rate risks on loans
Volvo has chosen to apply hedge accounting for a loan of 1 billion
euro borrowed in the second quarter 2007. Fair value of the outstand-
ing hedge instrument amounts to 1,088 (159). Volvo has also applied
hedge accounting for hedge of a currency risk in future repayment of
a loan in foreign currency for which the outgoing fair value of the
hedge instrument amounts 40 (neg 148). This hedge is designated as
a cash-fl ow hedge and changes in fair value has affected the cash-
fl ow hedge reserve within equity.
Volvo has not applied hedge accounting for fi nancial instruments
used to hedge interest and currency risks on loans before. Changes in
market value on the instruments used for hedging of risk in fi nancial
assets and liabilities for which hedge accounting has not been applied
are reported in net fi nancial income and expense, see note 11. Going
forward, in applicable cases when the requirements for hedge
accounting are considered to be fulfi lled, Volvo will consider to apply
hedge accounting for this kind of instruments.
Hedging of net investments in foreign operations
Volvo applies hedge accounting for certain net investments in foreign
operations. Current earnings from such hedging shall be accounted
for in a separate item within shareholders’ equity. A total of neg 473
(neg 59) in shareholders’ equity relating to hedging of net investments
in foreign operations was reported in 2008.
Hedge accounting
Cash-fl ow hedging
Derivative fi nancial instruments used for hedging of forecasted com-
mercial cash-fl ows and electricity consumption have, in accordance
with IAS 39, 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.
Accumulated changes in the value of the hedging instruments are
booked to the income statement of the same time as the underlying
hedged transaction affects the Group results.
The table in note 23, Shareholders’ equity shows how the currency
risk reserve has changed during the year.
To the extent that the requirements for hedge accounting are not
met, any changes in value attributable to derivatives are immediately
charged to the income statement.