Volvo 2011 Annual Report Download - page 126

Recognition of financial assets and liabilities
Purchases and sales of financial assets and liabilities are recognized on
the transaction date. A financial asset is derecognized in the balance
sheet when all significant risks and benefits linked to the asset have been
transferred to a third party. The same principles are applied for financial
assets in the segment reporting of the Volvo Group.
The fair value of assets is determined based on valid market prices,
when available. If market prices are unavailable, the fair value is deter-
mined for each asset using various measurement techniques. Transaction
expenses are included in the asset’s fair value, except in cases in which
the change in value is recognized in profit and loss. The transaction costs
that arise in conjunction with the assumption of financial liabilities are
amortized over the term of the loan as a financial cost.
Embedded derivatives are detached from the related main contract, if
applicable. Contracts containing embedded derivatives are valued at fair
value in profit and loss if the contracts’ inherent risk and other character-
istics indicate a close relation to the embedded derivative.
Financial assets at fair value through profit and loss
All of Volvo’s financial assets that are recognized at fair value in profit and
loss are classified as held for trading. This includes derivatives to which
Volvo has decided not to apply hedge accounting as well as derivates that
are not part of an evidently effective hedge accounting policy pursuant to
IAS 39. Gains and losses on these assets are recognized in profit and
loss. Short-term investments that are recognized at fair value mainly com-
prise interest-bearing financial instruments and are recognized in Note
18. Derivatives used for hedging interest rate exposure in the customer
financing portfolio are included in this category. Unrealized gains and
losses from fluctuations in the fair values of the financial instruments are
recognized in net financial items, since it is not practically possible to
apply hedge accounting in accordance with IAS 39 due to the large
number of contracts that the customer financing portfolio comprises. In
applicable cases, when the requirements for hedge accounting are con-
sidered to be fulfilled, Volvo will hereafter consider the application of
hedge accounting for these kinds of instruments. Volvo intends to hold
these derivatives to maturity, which is why, over time, the market valuation
will be offset as a consequence of the interest-rate fixing on borrowing
and lending for the customer-finance operations, and thus not affect
operating income or cash flow.
Refer to note 9 regarding derivatives used for hedging interest rate expo-
sure in the customer financing portfolio recongniced in net financial items.
Financial instruments used for hedging currency risks arising from
future firm commercial cash flows are also recognized under this category.
Unrealized gains and losses from fluctuations in the fair values of the
financial instruments related to a receivable or payable will be recognized
in the operating income of the respective segments. All other unrealized
gains and losses from fluctuations in the fair values of the financial instru-
ments are reported in the operating income of the segment Group func-
tions and other. When the financial instruments have been realized the
income effect is reported within the respective segments.
Loan receivables and other receivables
Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market. Accounts
receivables are recognized initially at fair value, which normally corre-
sponds to the nominal value. In the event that the payment terms exceed
one year, the receivable is recognized at the discounted present value.
After initial recognition, loans and receivables are measured at amortized
cost in accordance with the effective interest method. Gains and losses
are recognized in profit and loss when the loans or receivables are
divested or impaired, as well as in pace with recognition of accrued interest.
Assessment of impairment requirement
– loan receivables and other receivables
Volvo performs routine controls to ensure that the carrying amount of
assets valued at amortized cost has not decreased, which would result in
recognition of an impairment loss in profit and loss. Provisions for doubtful
receivables are recognized on an ongoing basis following assessments of
a possible change in the ability of customers to pay.
Impairment comprises the difference between the carrying amount and
the current value of the estimated future payment flow attributable to the
specific asset with consideration to the fair value of any collateral. Dis-
counting of future cash flow is based on the effective interest rate used
initially. Initially, the impairment requirement is evaluated for each respec-
tive asset. If, based on objective grounds, it cannot be determined 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 impaired assets or
assets impaired during previous periods are not included when grouping
assets for collective assessment. If the conditions that gave rise to the
recognition of an impairment loss later prove to no longer be valid the
impairment loss is reversed in profit and loss as long as the carrying
amount does not exceed the amortized cost at the time of the reversal.
Refer to Notes 15 and 16 for more information regarding Volvo’s loan
receivables and accounts receivables.
Assets available for sale
This category includes assets available for sale and assets that have not
been classified in any of the other categories. These assets are initially
measured at fair value including transaction costs. Any change in value is
recognized directly in other comprehensive income. The cumulative gain
or loss recognized in other comprehensive income is reversed in profit and
loss on the sale of the asset. Unrealized declines in value are recognized
in other comprehensive income, unless the decline is significant or pro-
longed. Then the impairment is recognized in profit and loss. If the event
that caused the impairment no longer exists, impairment can be reversed
in profit and loss if it does not involve an equity instrument.
Earned or paid interest attributable to these assets is recognized in
profit and loss as part of net financial items in accordance with the effec-
tive interest method. Dividends received attributable to these assets are
recognized in profit and loss as Income from other investments.
Volvo recognizes shares and participations in listed companies at market
value on the balance-sheet date, with the exception of investments classi-
fied as associated companies and joint ventures. Holdings in unlisted
companies for which a market value is unavailable are recognized at
acquisition cost. Volvo classifies these types of investments as assets
available for sale.
Assessment of impairment – assets available for sale
If assets available for sale are impaired, the impaired amount is the difference
between the asset’s cost (adjusted for any accrued interest if applicable)
and its fair value. However, if equity instruments, such as shares, are
involved, a completed impairment is not reversed in profit and loss. On the
other hand, impairments performed on debt instruments (interest-bearing
instruments) are wholly or partly reversible in profit and loss, in those
instances where an event, proven to have occurred after the impairment
was performed, is identified and impacts the valuation of that asset.
Refer to Note 5 for Volvo’s holdings of shares and participations in listed
companies.
FINANCIAL INSTRUMENTS
30
NOTE
ACCOUNTING POLICY
NOTES TO FINANCIAL STATEMENTS
FINANCIAL INFORMATION 2011
122