Volvo 2010 Annual Report Download - page 78

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2010 Volvo has applied hedge accounting for certain net
investments in foreign operations. The current result for such hedges
is reported in a separate component in shareholders’ equity. In the
event of a divestment, the accumulated result from the hedge is rec-
ognized in the income statement.
See notes 36 and 37 for the valuation of all financial instruments in
the Volvo Group and for details and further description on principles
for economic hedging, hedge accounting and changes to the policies
for hedging and hedge accounting during 2010 and going forward.
Research and development expenses
Volvo applies IAS 38, Intangible Assets, for reporting of research and
development expenses. In accordance with this standard, expend-
itures for development of new products, production systems and soft-
ware shall be reported as intangible assets if such expenditures with
a high degree of certainty will result in future financial benefits for the
company. The acquisition value for such intangible assets shall be
amortized over the estimated useful life of the assets. In order for
these development expenditures to be reported as assets, a number
of criteria must be met. For example, it must be possible to prove the
technical functionality of a new product or software prior to its devel-
opment being reported as an asset. In normal cases, this means that
expenditures are capitalized only during the industrialization phase of
a product development project. Other research and development
expenses are charged to income as incurred.
Intangible and tangible non-current assets
Volvo applies acquisition values for valuation of intangible and tan-
gible assets. Borrowing costs are included in the acquisition value of
assets that necessarily takes more than 12 months to get ready for its
intended use or sale, so called qualifying assets.
Investment property is reported at acquisition cost. Information
regarding estimated fair value of investment property is based on dis-
counted cash flow projections. The estimation is performed by the
Group’s Real Estate business unit. The required return is based on
current property market conditions for comparable properties in com-
parable locations.
In connection with participation in industrial cooperation projects
together with other companies, such as the aircraft engine projects
that Volvo Aero participates in, Volvo pays in certain cases an entrance
fee to participate. These entrance fees are capitalized as intangible
assets.
Depreciation, amortization and impairment
Depreciation is made on a straight-line basis based on the acquisition
value of the assets, adjusted in appropriate cases by write-downs, and
estimated useful lives. Depreciation is reported in the respective func-
tion to which it belongs. Impairment tests for depreciable non-current
assets are performed if there are indications of impairment at the bal-
ance sheet date.
Goodwill is reported as an intangible non-current asset with
indefin ite useful life. For non-depreciable non-current assets such as
goodwill, impairment tests are performed annually, as well as if there
are indications of impairments during the year, through calculation of
the asset’s recovery value. If the calculated recovery value is less than
the carrying value, a write-down is made to the asset’s recovery value.
See note 14 for goodwill.
Depreciation periods
Capitalized type-specific tools 2 to 8 years
Operational leases 3 to 5 years
Machinery 5 to 20 years
Buildings and Investment property 25 to 50 years
Land improvements 20 years
Trademarks 20 years
Distribution networks 10 years
Product and software development 3 to 8 years
Aircraft engine projects 20years
Non-current assets held for sale and discontinued operations
Volvo applies IFRS 5, Non-current Assets Held for Sale and Discon-
tinued Operations. The standard also includes current assets. In a
global group like Volvo, processes are continuously ongoing regarding
the sale of assets or groups of assets at minor values. In cases in
which the criteria for being classified as a non-current asset held for
sale are fulfilled and the asset or group of assets is not of minor value,
the asset or group of assets and the related liabilities are reported on
a separate line in the balance sheet. The asset or group of assets are
tested for impairment and, if impaired valued at fair value after deduc-
tion for selling expenses. The balance sheet items and the income
effect resulting from the revaluation to fair value less costs to sell are
normally reported in the segment Group headquarter functions and
other, until the sale is completed and the result from it is assigned to
the other segments.
Inventories
Inventories are reported at the lower of cost, in accordance with the
first-in, first-out method (FIFO), or net realizable value. The acquisition
value is based on the standard cost method, including costs for all
direct manufacturing expenses and the apportionable share of the
capacity and other related manufacturing costs. The standard costs
are tested regularly and adjustments are made based on current con-
ditions. Costs for research and development, selling, administration
and financial expenses are not included. Net realizable value is calcu-
lated as the selling price less costs attributable to the sale.
Share-based payments
Volvo applies IFRS 2, Share-based Payments for share-based incen-
tive programs. IFRS 2 distinguishes between “cash-settled” and
“equity-settled”, in Volvo’s case, shares. The Volvo program includes
both a cash-settled and an equity-settled part, however this is not
applicable for 2010 as there were no program in 2010. The value of
the equity-settled payments is determined at the grant-date, recog-
nized as an expense during the vesting period and off-set in equity.
The fair value is calculated according to share price reduced by divi-
dend connected to the share before the allotment. The additional
social costs are reported as a liability, revalued at each balance sheet
date in accordance with UFR 7, issued by the Swedish Financial
Reporting Board. The cash-settled payment is revalued at each bal-
ance sheet day and is reported as an expense during the vesting
period and as a short term liability. An assessment whether the terms
for allotment will be fulfilled is made continuously. If the assessment
changes, the expense will be adjusted. See note 34.
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.
FINANCIAL INFORMATION 2010
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