Volvo 2010 Annual Report Download - page 77

included in this category as it is not practically possible to apply hedge
accounting in accordance with IAS 39 due to the large number of
contracts that the customer finance portfolio consist of. Volvo intends
to keep these derivatives to maturity, why, over time, the market valu-
ation will be offset as a consequence of the interest-rate fixing on
borrowing and lending for the customer finance operations, and
accordingly not affect result or cash flow.
Financial assets held to maturity
Held-to-maturity investments are non-derivative assets with fixed
payments and terms and that Volvo intends and is able to hold to
maturity. After initial recognition, these assets are measured in
accordance with the effective interest method, with adjustment for
any impairment. Gains and losses are recognized in the income state-
ment when assets are divested or impaired as well as in pace with the
accrued interest being reported. At present Volvo has no financial
instruments classified in this category.
Loan receivables and other receivables
Loans and receivables are non-derivative financial assets with fixed or
determinable payments, originated or acquired, that are not quoted in
an active market. After initial recognition, loans and receivables are
measured in accordance with the effective interest method. Gains and
losses are recognized in the income statement when the loans or
receivables are divested or impaired as well as in pace with the
accrued interested being reported.
Accounts receivables are recognized initially at fair value, which
normally corresponds to the nominal value. In the event that the pay-
ment terms exceed one year, the receivable is recognized at the dis-
counted present value.
Assessment of impairment – loan receivables and other receivables
Volvo conducts routine controls to ensure that the carrying value of
assets valued at amortized cost, such as loans and receivables, has
not decreased, which would result in an impairment loss reported in
the income statement. Allowances for doubtful receivables are con-
tinuously reported based on an assessment of a possible change in
the customer’s ability to pay.
Impairments consist of the difference between carrying value and
current value of the estimated future payment flow attributable to the
specific asset with consideration to the fair value of any collateral.
Discounting of future cash flow is based on the effective rate used
initially. Initially, the impairment requirement is evaluated for each
respective asset. If, based on objective grounds, it cannot be deter-
mined that one or more assets are subject to an impairment loss, the
assets are grouped in units based, for example, on similar credit risks
to evaluate the impairment loss requirement collectively. Individually
written down assets or assets written down during previous periods
are not included when grouping assets for impairment test.
If the conditions for a completed impairment loss later prove to no
longer be present the impairment loss is reversed in the income state-
ment as long as the carrying value does not exceed the amortized
cost at the time of the reversal.
Volvo discloses loan receivables and accounts receivables in the
notes 16, 17, 19 and 20.
Available-for-sale assets
This category includes assets available for sales or those that have
not been classified in any of the other three categories. These assets
are initially measured at fair value including transaction costs. Fair
value changes are recognized directly in other comprehensive income.
The cumulative gain or loss that was recognized in other comprehen-
sive income is recognized in profit or loss when an available-for-sale
financial asset is sold. Unrealized value declines are recognized in
other comprehensive income, unless the decline is significant or pro-
longed. Then the impairment is recognized in the income statement. If
the event causing the impairment no longer exists, impairment can be
reversed in the income statement if it does not involve an equity
instrument.
Earned or paid interest attributable to these assets is recognized in
the income statement as part of net financial items in accordance with
the effective interest method. Dividends received attributable to these
assets are recognized in the income statement as Income from other
investments.
Volvo reports shares and participations in listed companies at mar-
ket value on the balance-sheet date, with the exception of invest-
ments classified as associated companies and joint ventures. Hold-
ings in unlisted companies for which a market value is unavailable are
recognized at acquisition value. Volvo classifies these types of invest-
ments as assets available for sale. See note 15 for Volvo’s holdings of
shares and participations in listed companies.
Assessment of impairment – available-for-sale assets
If an asset available for sale is to be impaired, it shall be effected by
taking the difference between the asset’s acquisition value (adjusted
for any accrued interest if it involves that type of asset) and its fair
value. If it instead involves equity instruments such as shares, a com-
pleted impairment shall not be reversed in the income statement. On
the other hand, impairments that have been made on debt instru-
ments (interest-bearing instruments) shall in whole or part be reversed
in the income statement, in those instances where an event that is
proven to have occurred after the impairment was performed is identi-
fied and impacts the valuation of that asset.
Hedge accounting
Derivatives used for hedging of firm future commercial currency expo-
sure as well as forecasted electricity consumption have, in accord-
ance with IAS 39, been reported at fair value in the balance sheet.
Since the fourth quarter 2009 hedge accounting is not applied on
new financial instruments used for hedging commercial flows. How-
ever for previously entered financial instruments hedge accounting is
continuously applied. The majority of those financial instruments have
expired during the year.
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. When the derivative financial instrument have been
realized the income effect is reported within the respective segments.
As from January 1, 2011 unrealized changes in fair value of financial
instruments related to a receivable or payable will be reported within the
respective segments. All other unrealized changes in fair value of
financial instruments will henceforth be reported in the income state-
ment in the segment Group headquarter functions and other.
During 2010 Volvo has partly applied hedge accounting for finan-
cial instruments used to hedge interest and currency risks on loans
only for cases when hedge accounting requirements are fulfilled. This
concerns a loan of 1 billion euro borrowed in 2007. The changes
in the fair value of the outstanding hedge instruments and the
changes in the carrying value of the loan are reported in the income
statement. For cases where hedge accounting is not considered to be
fulfilled, unrealized gains and losses up until the maturity date of the
financial instrument will be charged to the financial net in the income
statement.
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