Volvo 2009 Annual Report Download - page 117

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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 2010 amount 500 39 102 (1,275) 1,473
Due date 2011 amount (9) (6) 2 – 84
Due date 2012 amount (5) – –
Total 486 33 104 (1,275) 1,557
Average contract rate 7.84 12.52 10.30 0.08
Fair value of outstanding forward contracts 233 31 3(3) (78) 186
Hedge accounting
Cash-flow hedging
Derivative financial instruments used for hedging of forecasted and
contracted commercial cash-flows and electricity consumption have,
in accordance with IAS 39, been reported at fair value in the balance
sheet. When hedge accounting is applied on the financial instruments
the fair value is debited or credited to a separate component of equity
to the extent the requirements for cash-flow hedge accounting are
fulfilled. Accumulated changes in the value of the hedging instru-
ments are reported in 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.
Volvo tests all cash-flow hedges for effectiveness when they are
entered into. Hedging is considered to be effective when the pro-
jected future cash flow’s currency fluctuation and maturity date coin-
cide with those of the hedging instrument. The hedging relationship is
regularly tested up until its maturity date. If the identified relationships
are no longer deemed effective, the currency fluctuations on the
hedging instrument from the last period the instrument was consid-
ered effective are reported in the Group’s income statement. For
2009, Volvo reported 36 (positive 22) as a loss related to the inef-
fectiveness of cash-flow hedging.
From the fourth quarter in 2009 hedge accounting is not applied
on new financial instruments used for hedging commercial flows.
However for the major part of the earlier initiated financial instruments
hedge accounting is continuously applied until expiration of these
contracts. For the remaining part of earlier initiated contracts the cur-
rency risk reserve is frozen.
When hedge accounting is not applied, unrealized gains and losses
from fluctuations in the fair values of the financial instruments are
reported in the income statement in the segment Group headquarter
functions and other. This has negativley affected the Group’s operat-
ing income by 27 in 2009. When the derivative financial instrument
have been realized the income effect is reported within the respective
segments.
The hedged amount of projected future flows for all periods are
within the framework of Volvo’s currency policy. Volvo has revised its
hedging policy from the fourth quarter in 2009 in order to only hedge
firm flows going forward, whereof the major part are realized within six
months.
Hedging of forecasted electricity is considered to be effective
when predetermined factors that affect electricity prices are in agree-
ment with forecasts of future electricity consumption and designated
derivative instruments. The hedging relationship is regularly tested up
until its maturity date. If the identified relationships are no longer
deemed effective, the currency fluctuations on the hedging instru-
ment from the last period the instrument was considered effective are
reported in the Group’s income statement. For 2009, Volvo reported
4 (1) related to the ineffectiveness of the hedging of forecasted elec-
tricity 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 1,159 (1,088). The carrying value of
the loan related to hedge accounting amounts to a negative 970 (neg
882). The changes in the fair value of the outstanding hedge instru-
ments and the changes in the carrying value of the loan are reported
in the income statement.
Volvo has not applied hedge accounting for financial instruments
used to hedge interest and currency risks on loans before. Changes in
market value on the instruments used for hedging of risk in financial
assets and liabilities for which hedge accounting has not been applied
are reported in net financial income and expense, see note 11. Going
forward, in applicable cases when the requirements for hedge
accounting are considered to be fulfilled, 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 negative
314 (neg 473) in shareholders’ equity relating to hedging of net invest-
ments in foreign operations was reported in 2009.
The heged amount of projected future flows for all periods are within the framework of Volvo’s currency policy.
113