Volvo 2008 Annual Report Download - page 89

85
Financial information 2008
Note 2 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 endorsed by the EU. The prep-
aration 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 considera-
tion to materiality. The application of these accounting principles
involves the exercise of judgement and use of assumptions as future
uncertainties and, accordingly 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 tan-
gible non-current assets amounted to 126,657 (106,220) whereof
24,813 (19,969) represents goodwill. For Goodwill and certain other
intangible assets with indefi nite useful lives, an annual impairment
review is performed. Such an impairment review will require manage-
ment 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 similar impairment
review. No impairment charges were required for the period 2002
until 2008. See note 14 for the allocation and impairment tests of
goodwill.
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 re sidual
value guarantee, as described below regarding residual value risks,
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 agreement 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 regarding whether or not sig-
nifi 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 reporting periods.
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. Residual value commitments amount to SEK
16.422 million at December 31, 2008. Residual value risks are
refl ected in different ways in the Volvo consolidated fi nancial state-
ments depending on the extent to which the risk remains with Volvo.
In cases where signifi cant risks pertaining to the product remain
with Volvo, the products, primarily trucks, 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 product to its estimated net realizable value at the end of the
commitment. The estimated net realizable value of the products at the
end of the commitments is monitored individually on a continuing
basis. In monitoring estimated net realizable value of each product
under a residual value commitment, management makes consider-
ation 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. Additional depreciations and esti-
mated impairment losses are immediately charged to income.
The total risk exposure for assets under operating lease is reported as
current and non-current residual value liabilities. See notes 26 and 27.
If the residual value risk commitment is not signifi cant, independent
from the sale transaction or in combination with a commitment from
the customer to buy a new Volvo product in connection to a buy-back
option, the asset is not recognized on balance. Instead, the risk
ex posure is reported as a residual value provision equivalent to the
estimated residual value risk. See note 25. To the extent the residual
value exposure does not meet the defi nition of a provision, the remain-
ing residual value risk exposure is reported as a contingent liability.
See note 29.
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 for deferred tax assets where manage-
ment does not expect such assets to be realized based upon current
forecasts. In the event that actual results differ from these estimates
or management adjusts these estimates in future periods, changes in
the valuation allowance may be needed that could materially impact
the fi nancial position and the income for the period. At December 31,
2008, the valuation allowance amounted to 245 (156) for the value of
deferred tax assets. Net of this valuation allowance, deferred tax
assets net of 16,003 (12,208) were recognized in the Group’s balance
sheet.