Volvo 2009 Annual Report Download - page 81

the valuation allowance may be needed that could materially impact
the financial position and the income for the period. At December 31,
2009, the valuation allowance amounted to 296 (245) for the value of
deferred tax assets. Net of this valuation allowance, deferred tax assets
net of 21,533 (16,003) were recognized in the Group’s balance sheet.
Volvo has significant tax loss carryforwards which are related to
countries with long or indefinite periods of utilization, mainly Sweden
and France. Of the total deferred tax asset for loss carryforwards
8,939, 4,653 relates to Sweden with indefinite time of utilization.
Volvo conciders it to be most certain that the Volvo Group will be able
to generate sufficient income in the coming years to utilize the tax
loss carryforwards.
Inventory obsolescence
Inventories are reported at the lower of cost, in accordance with the
first-in, first-out method (FIFO), and net realizable value. The esti-
mated net realizable value includes management consideration of
outdated articles, over-stocking, physical damages, inventory-lead-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 inventory
obsolescence. The total inventory value, net of inventory obsoles-
cence allowance, is per December 31, 2009, 37,727 (55,045).
Credit loss reserves
The establishment of credit loss reserves on customer financing
receivables is dependent on estimates including assumptions regarding
past dues, repossession rates and the recovery rate on the underlying
collaterals. At December 31, 2009, the total credit loss reserves in the
segment Customer Finance segment amounted to 1.67% (1.37) of
the total credit portfolio in the segment. See note 36 for a description
of the credit risk.
Pensions and other post-employment benefits
Provisions and costs for post-employment benefits, mainly pensions
and health-care benefits, 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 which result in obligations for post-
employment benefits. The assumptions include discount rates, health
care cost trends rates, inflation, salary growth, long-term return on
plan assets, retirement rates, mortality rates and other factors. Accord-
ing 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 reflect the time-value
of money but not the actuarial or investment risk. Volvo’s assumptions
regarding discount rate are presented in note 24. Health care cost
trend assumptions are based on historical cost data, the near-term
outlook, and an assessment of likely long-term trends. Inflation
assumptions are based on an evaluation of external market indicators.
The salary growth assumptions reflect the long-term actual experi-
ence, the near-term outlook and assumed inflation. Retirement and
mortality rates are based primarily on officially available mortality sta-
tistics. The actuarial assumptions are reviewed on an annual basis and
modifications 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
benefits. At December 31, 2009 net provisions for post-employment
benefits amounted to 6,002 (9,264).
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 consideration
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 recognized
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, 2009 warranty cost
provisions amounted to 7,947 (10,354).
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 financial 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 significant 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 financial 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 affect future financial statements, with an
adverse impact upon the Group’s results of operation, financial posi-
tion and liquidity. See note 29 for the Volvo Group’s gross exposure to
contingent liabilities.
Note 3 Change of accounting principles
New accounting principles in 2009
The following new accounting principles are effective from January 1,
2009 and have been applied by the Volvo Group unless stated other-
wise:
IFRS 8 Operating segments
The standard addresses the distribution of the company’s operations
in different segments. In accordance with the standard, Volvo has an
approach based on the internal reporting structure and determine the
reportable segments based on this structure. The adoption of IFRS 8
has not resulted in any change in the identification of segments. Volvo
has however, in connection to the implementation of IFRS 8, removed
the reclassification of leases from operating to finance leases within
the Customer Finance segment. Volvo also reports currency exchange
effects in gross income, that were earlier reported in operating
income. As described in note 3 of the Volvo Group Annual report
2008 comparison numbers for 2008 have been restated
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