Volvo 2008 Annual Report Download - page 90

Notes to consolidated fi nancial statements
86
THE VOLVO GROUP
Financial information 2008
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 of inventory obsoles-
cence allowance, is per December 31, 2008, 55,045 (43,645).
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 collaterals. At December 31, 2008, the total credit loss reserves
in the segment Customer Finance segment amounted to 1.37% (1.59)
of the total credit portfolio in the segment. See note 36 for a descrip-
tion of the credit risk.
Pensions and other post-employment benefi ts
Provisions and costs for post-employment benefi ts, mainly pensions
and health-care benefi ts, are dependent on assumptions used by
actuaries in calculating such amounts. The appropriate assumptions
and actuarial calculations are made separately for the respective
countries of Volvo’s operations. The assumptions include discount
rates, health care cost trends rates, infl ation, salary growth, long-term
return on plan assets, retirement rates, mortality rates and other fac-
tors. According to IAS 19, actuarial assumptions such as the discount
rate shall be based on market expectations at the balance sheet date
for the period over which the obligations are to be settled and refl ect
the time-value of money but not the actuarial or investment risk. The
market situation at the end of the fi nancial year 2008 makes discount
rate assumptions specially diffi cult to determine. Volvo’s assumptions
regarding discount rate are presented in note 24. Health care cost
trend assumptions are developed based on historical cost data, the
near-term outlook, and an assessment of likely long-term trends. Infl a-
tion assumptions are based on an evaluation of external market indi-
cators. 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. See Note 24 for more
information regarding costs and assumptions for post-employment
benefi ts. At December 31, 2008 net provisions for post-employment
benefi ts amounted to 9,264 (7,643).
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 considera-
tion 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 certain. At December 31, 2008
warranty cost provisions amounted to 10,354 (9,373).
Legal proceedings
Volvo recognizes obligations in the Group accounts as provisions or
other liabilities only in cases where Volvo has a present obligation
from a past event, where a fi nancial responsibility is probable and
Volvo can make a reliable estimate of the size of the amount. In
instances where these criteria are not met, a contingent liability may
be disclosed in the notes to the accounts.
Volvo regularly reviews the development of signifi cant outstanding
legal disputes in which Group companies are parties, both civil law
and tax disputes, in order to assess the need for provisions and con-
tingent liabilities in the fi nancial statements. Among the factors that
Volvo considers in making decisions on provisions and contingent
liabilities are the nature of the dispute, the amount claimed, the
progress of the case, the opinions or views of legal counsels and other
advisers, experience in similar cases, and any decision of Volvo’s man-
agement as to how Volvo intends to handle the dispute. The actual
outcome of a legal dispute may deviate from the expected outcome of
the dispute. The difference between actual and expected outcome of
a dispute might materially affected future fi nancial statements, with
an adverse impact upon our results of operation, fi nancial position and
liquidity. See note 29 for the Volvo Group’s gross exposure to contin-
gent liabilities.