Volvo 2009 Annual Report Download - page 110

Notes to consolidated financial statements
also assumes a parallel shift in the yield curve and an identical effect
of changed market interest rates on the interest-rates of both assets
and liabilities. Consequently, the effect of actual interest-rate changes
may deviate from the above analysis. Volvo uses derivatives to hedge
currency and interest rate risks.
Currency risks
The content of the reported balance sheet may be affected by changes
in different exchange rates. Currency risks in Volvo’s operations are
related to changes in the value of contracted and expected future
payment flows (commercial currency exposure), changes in the value
of loans and investments (financial currency exposure) and changes
in the value of assets and liabilities in foreign subsidiaries (currency
exposure of shareholders’ equity). The aim of Volvo’s currency-risk
management is to minimize, over the short term, negative effects on
Volvo’s earnings and financial position stemming from exchange-rate
changes.
Commercial currency exposure
In order to hedge the value of future payment flows in foreign
currencies, Volvo uses forward contracts and currency options. During
2008, 75% of the forecasted net flows for each currency for the coming
six months were hedged and 50% for months seven to twelve. Con-
tracted flows after 12 months were normally hedged. As a conse-
quence of the financial turmoil, Volvo gradually shifted focus in 2009
from hedging forecasted flows to only hedge contracted flows. From
the fourth quarter 2009, Volvo revised its hedging policy in order to
only hedge firm flows, whereof the major part are realised within six
months. Also, from the fourth quarter 2009, hedge accounting was
not applied for new contracts. For details regarding Hedge account-
ing, refer to note 37.
The nominal amount of all outstanding forward and option con-
tracts amounted to SEK 17.2 billion (73.8) at December 31, 2009. On
the same date, the fair value of these contracts was positive in an
amount of SEK 186 million (negative 2,936).
The table below presents the effect a change of the value of the
Swedish krona in relation to other currencies would have on the fair
value of outstanding contracts. In reality, currencies usually do not
change in the same direction at any given time, so the actual effect of
exchange-rate changes may differ from the below sensitivity analysis.
Change in value of SEK in relation to
all foreign currencies, % Fair value of outstanding contracts
(10) (773)
0186
10 1,145
Financial currency exposure
Loans and investments in the Group’s subsidiaries are done mainly
through Volvo Treasury in local currencies, which minimizes individual
companies’ financial currency exposure. Volvo Treasury uses various
derivatives, in order to facilitate lending and borrowing in different cur-
rencies without increase the company’s own risk. The financial net
position of the Volvo Group is affected by exchange rate fluctuations,
since financial assets and liabilities are distributed among Group
companies that conduct their operations in different currencies.
Currency exposure of shareholders’ equity
The consolidated value of assets and liabilities in foreign subsidiaries
is affected by current exchange rates in conjunction with translation of
assets and liabilities to Swedish kronor. To minimize currency expos-
ure of shareholders’ capital, the size of shareholders’ equity in foreign
subsidiaries is continuously optimized with respect to commercial and
legal conditions. Currency hedging of shareholders’ equity may occur
in cases where a foreign subsidiary is considered overcapitalized. Net
assets in foreign subsidiaries and associated companies amounted at
year-end 2009 to SEK 59.4 billion (66.0). Of this amount, SEK 4.1
billion (4.3) was currency-hedged through loans in foreign currencies.
Out of the loans used as hedging instruments SEK 3.1 billion are due
in 2010 and the remaining SEK 1.0 billion in 2011. The need to under-
take currency hedging relating to investments in associated com-
panies and other companies is assessed on a case-by-case basis.
Credit risks
Volvo’s credit granting is steered by Group-wide policies and cus-
tomer-classification rules. The credit portfolio should contain a sound
distribution among different customer categories and industries. The
credit risks are managed through active credit monitoring, follow-up
routines and, where applicable, product reclamation. Moreover, regular
monitoring ensures that the necessary provisions are made for
incurred losses on doubtful receivables. In the tables below, ageing
analyses are presented of accounts receivables overdue and cus-
tomer finance receivables overdue in relation to the reserves made. It
is not unusual that a receivable is settled a couple of days after due
date, which affects the extent of the age interval 1–30 days.
The credit portfolio of Volvo’s customer-financing operations
amounted at December 31, 2009, to approximately SEK 82 billion
(98). The credit risk of this portfolio is distributed over a large number
of retail customers and dealers. Collaterals are provided in the form of
the financed products. Credit granting aims for a balance between
risk exposure and expected yield. The Volvo Group’s financial assets
are largely managed by Volvo Treasury and invested in the money and
capital markets. All investments must meet the requirements of low
credit risk and high liquidity. According to Volvo’s credit policy, counter-
parties for investments and derivative transactions should have a
rating of A or better from one of the well-established credit rating
institutions.
The use of derivatives involves a counterparty risk, in that a poten-
tial gain will not be realized if the counterparty fails to fulfill its part of
the contract. To reduce the exposure, master netting agreements are
signed, wherever possible, with the counterparty in question. Counter-
party risk exposure for futures contracts is limited through daily or
monthly cash transfers corresponding to the value change of open
contracts. The estimated gross exposure to counterparty risk relating
to futures, interest-rate swaps and interest-rate forward contracts,
options and commodities contracts amounted at December 31, 2009,
to 588 (3,798 ), 3.560 (2,763 ), 167 (229) and 42 (38).
Credit portfolio – Accounts receivable and
Customer financing receivables
Accounts receivable 2008 2009
Accounts receivable gross 32,272 22,638
Valuation allowance for doubtful
accounts receivable (1,749) (1,301)
Accounts receivable net 30,523 21,337
For details regarding the accounts receivable and the valuation for
doubtful accounts receivable, refer to note 20.
FINANCIAL INFORMATION 2009
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