Volvo 2011 Annual Report Download - page 104

Impairment of goodwill and other intangible assets
Intangible assets other than goodwill are amortized and depreciated over
their useful lives. Useful lives are based on estimates of the period in
which the assets will generate revenue. If, at the date of the financial
statements, any indication exists that an intangible non-current asset has
been impaired, the recoverable amount of the asset is calculated. The
recoverable amount is the higher of the asset’s net selling price and its
value in use, estimated with reference to management’s projections of
future cash flows. If the recoverable amount of the asset is less than the
carrying amount, an impairment loss is recognized and the carrying
amount of the asset is reduced to the recoverable amount. Determination
of the recoverable amount is based upon management’s projections of
future cash flows, which are generally based on internal business plans or
forecasts. While management believes that estimates of future cash flows
are reasonable, different assumptions regarding such cash flows could
materially affect valuations. The need for impairment of goodwill and cer-
tain other intangible assets with indefinite useful lives is determined on an
annual basis, or more frequently if required through calculation of the
value of the asset. Such an impairment review will require management to
determine the fair value of Volvo’s cash generating units, on the basis of
projected cash flows and internal business plans and forecasts. Surplus
values differ between the business areas and they are, to a varying
degree, sensitive to changes in assumptions and the business environ-
ment. Volvo has performed similar impairment reviews since 2002. No
need for impairment losses was required for the period 2002 until 2011.
INTANGIBLE ASSETS
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NOTE
Intangible assets
Volvo applies the cost method of valuation for measurement of intangible
assets. Borrowing costs are included in the cost of assets that necessar-
ily take more than 12 months to prepare for their intended use or sale,
known as qualifying assets.
When participating in industrial projects in partnership with other com-
panies, such as the aircraft engine projects in which Volvo Aero partici-
pates, Volvo pays an entrance fee to participate in certain cases. These
entrance fees are capitalized as intangible assets.
Research and development expenses
Volvo applies IAS 38, Intangible Assets, for the recognition of research
and development expenses. Pursuant to this standard, expenditures for
the development of new products, production systems and software are
recognized as intangible assets if such expenditures, with a high degree
of certainty, will result in future financial benefits for the company. The
cost for such intangible assets is amortized over the estimated useful life
of the assets.
The rules require stringent criteria to be met for these development
expenditures to be recognized as assets. For example, it must be possible
to prove the technical functionality of a new product or software prior to
its development being recognized 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.
Volvo has developed a process for conducting product development
projects named the Global Development Process (GDP). The GDP has six
phases focused on separate parts of the project. Every phase starts and
ends with a reconciliation point, known as a gate, the criteria for which
must be met for the project’s decision-making committee to open the
gate and allow the project to progress to the next phase. During the
industrialization phase, the industrial system is prepared for series pro-
duction and the product is launched.
Goodwill
Goodwill is recognized as an intangible asset with indefinite useful life.
For non-depreciable assets such as goodwill, impairment tests are per-
formed annually, as well as if there are indications of impairments during
the year, by calculating the asset’s recovery value. If the calculated recov-
ery value is less than the carrying value, the asset’s recovery value is
impaired.
Volvo’s measurement model is based on a discounted cash-flow model,
with a forecast period of four to six years. Cash-generating units, identified
as Volvo’s business areas, are measured.
Goodwill assets are allocated to these cash-generating units on the
basis of anticipated future utility. Measurements are based on manage-
ment’s best estimation of the operations’ development. The basis for this
estimation is long-term forecasts of the market’s growth, 2 to 4%, in rela-
tion to the performance of Volvo’s operations. In the model, Volvo is
expected to maintain stable capital efficiency over time. Measurements
are based on nominal values and utilize a general rate of inflation in line
with the European target. Volvo uses a discounting factor calculated to
12% (12) before tax for 2011.
In 2011, the value of Volvo’s operations exceeded the carrying amount
of goodwill for all business areas, which is why no impairment was recog-
nized. Volvo has also tested whether a surplus value would still exist after
being subjected to reasonable potential changes to the assumptions,
negatively adjusted by one percentage point on an individual basis,
whereof no adjustment would have sufficient impact to require impairment
for the majority of the carrying amount.
Since the surplus values differ between the business areas, they are to
a varying degree sensitive to changes in the assumptions described
above. Therefore, Volvo continuously follows the performance of the busi-
ness areas whose overvalue is dependent on the fulfillment of Volvo’s
assessments. Instability in the recovery of the market and volatility in
interest and currency rates may lead to indications of a need for impair-
ment. The most important factors for the future operations of Volvo are
described in the Volvo business area section, as well as in the Risk man-
agement section.
Depreciation, amortization and impairment
Depreciation is made on a straight-line basis based on the cost of the
assets, adjusted in appropriate cases by impairments, and estimated use-
ful lives. Depreciation is reported in the respective function to which it
belongs. Impairment tests for depreciable assets are performed if there
are indications of impairment at the balance sheet date.
Depreciation/amortization periods
Trademarks 20 years
Distribution networks 10 years
Product and software development 3 to 8 years
Aircraft engine projects 35 years
* The depreciation/amortization period for aircraft engine projects was changed
from 20 to 35 years as of 2010.
ACCOUNTING POLICIES
SOURCES OF ESTIMATION UNCERTAINTY
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NOTES TO FINANCIAL STATEMENTS
FINANCIAL INFORMATION 2011
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