Volvo 2009 Annual Report Download - page 79

Provisions
Provisions are reported on balance when a legal or constructive obli-
gation exists as a result of a past event and it is probable that an
outflow of resources will be required to settle the obligation and the
amount can be reliably estimated.
Pensions and similar obligations (Post-employment benefits)
Volvo applies IAS 19, Employee Benefits, for pensions and similar
obligations. In accordance with IAS 19, actuarial calculations should
be made for all defined-benefit plans in order to determine the present
value of obligations for benefits vested by its current and former
employees. The actuarial calculations are prepared annually and are
based upon actuarial assumptions that are determined close to the
balance sheet date each year. Changes in the present value of obliga-
tions due to revised actuarial assumptions and experience adjust-
ments are treated as actuarial gains or losses. These are amortized
according to function over the employees’ average remaining service
period to the extent they exceed the corridor value for each plan.
Deviations between expected return on plan assets and actual
return are also treated as actuarial gains or losses. Provisions for
post-employment benefits in Volvo’s balance sheet correspond to the
present value of obligations at year-end, less fair value of plan assets,
unrecognized actuarial gains or losses and unrecognized unvested
past service costs. See note 24.
As a supplement to IAS 19, Volvo applies UFR 4, in accordance with
the recommendation from the Swedish Financial Reporting Board in
calculating the Swedish pension liabilities.
For defined contribution plans premiums are expensed as incurred
over the income statement according to function.
Provisions for residual value risks
Residual value risks are attributable to operating lease contracts or
sales transactions combined with buy-back agreements or residual
value guarantees. Residual value risks are the risks that Volvo in the
future would have to dispose used products at a loss if the price devel-
opment of these products is worse than what was expected when the
contracts were entered. Provisions for residual value risks are made
on a continuing basis based upon estimations of the used products’
future net realizable values. The estimations of future net realizable
values are made with consideration to current prices, expected future
price development, expected inventory turnover period and expected
direct and indirect selling expenses. If the residual value risks pertain
to products that are reported as tangible assets in Volvo’s balance
sheet, these risks are reflected by depreciation or write-down of the
carrying value of these assets. If the residual value risks pertain to
products, which are not reported as assets in Volvo’s balance sheet,
these risks are reflected under the line item current provisions.
Contingent liabilities
A contingent liability is reported for a possible obligation, for which it
is not yet confirmed that a present obligation exists that could lead to
an outflow of resources; or for a present obligation that does not meet
the definitions of a provision or a liability as it is not probable that an
outflow of resources will be required to settle the obligation or when a
sufficiently reliable estimate of the amount cannot be made.
Warranty expenses
Estimated costs for product warranties are charged to operating
expenses when the products are sold. Estimated costs include both
expected contractual warranty obligations as well as expected good-
will warranty obligations. Estimated costs are determined based upon
historical statistics with consideration of known changes in product
quality, repair costs or similar. Costs for campaigns in connection with
specific quality problems are charged to operating expenses when the
campaign is decided and announced.
Restructuring costs
Restructuring costs are reported as a separate line item in the income
statement if they relate to a considerable change of the Group struc-
ture. Other restructuring costs are included in Other operating income
and expenses. A provision for decided restructuring measures is
reported when a detailed plan for the implementation of the measures
is complete and when this plan is communicated to those who are
affected.
Income taxes
Tax legislation in Sweden and other countries sometimes contains
rules other than those identified with generally accepted accounting
principles, pertaining to the timing of taxation and measurement of
certain commercial transactions. Deferred taxes are reported on dif-
ferences that arise between the taxable value and reported value of
assets and liabilities (temporary differences) as well as on tax-loss
carryforwards. However, with regard to the valuation of deferred tax
assets, that is, the value of future tax reductions, these items are rec-
ognized provided that it is probable that the amounts can be utilized
against future taxable income.
Deferred taxes on temporary differences on participations in sub-
sidiaries and associated companies are only reported when it is prob-
able that the difference will be recovered in the near future.
Tax laws in Sweden and certain other countries allow companies to
defer payment of taxes through allocations to untaxed reserves.
These items are treated as temporary differences in the consolidated
balance sheet, that is, a split is made between deferred tax liability
and equity capital. In the consolidated income statement an allocation
to, or withdrawal from, untaxed reserves is divided between deferred
taxes and net income for the year.
Cash-flow statement
The cash-flow statement is prepared in accordance with IAS 7, Cash
flow statement, indirect method. The cash-flow statements of foreign
Group companies are translated at the average rate. Changes in
Group structure, acquisitions and divestments, are reported net,
excluding cash and cash equivalents, in the item Acquisition and
divestment of subsidiaries and other business units and are included
in cash flow from Investing activities.
Cash and cash equivalents include cash, bank balances and parts
of marketable securities, with date of maturity within three months at
the time for investment. Marketable securities comprise interest-
bearing securities, the majority of which with terms exceeding three
months. However, these securities have high liquidity and can easily
be converted to cash. In accordance with IAS 7, certain investment in
marketable securities are excluded from the definition of cash and
cash equivalents in the cash-flow statement if the date of maturity of
such instruments is later than three months after the investment was
made.
Earnings per share
Earnings per share are calculated as the income for the period attrib-
uted to the shareholders of the parent company, divided with the aver-
age number of outstanding shares per reporting period. To calculate
the diluted earnings per share, the average number of shares in the
denominator is adjusted with the average number of shares that would
be issued as an effect of ongoing share-based incentive programs
and employee stock option programs that have been exercised or
cancelled during the period. See note 23.
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