Volvo 2011 Annual Report Download - page 74

BOARD OF DIRECTORS’ REPORT 2011
The nature of the various financial risks and
objectives and the policies for the management
of these risks are described in detail in notes 4
and 30. Various aspects of financial risk are
described briefly in the following paragraphs.
Volvo’s accounting policies for financial instru-
ments are described in note 30. The overall impact
on a company’s competitiveness is also affected
however by how various macro-economic factors
interact.
Interest-related risk
Interest-related risk includes risks that changes
in interest rates will impact the Group’s income
and cash flow (cash-flow risks) or the fair value
of financial assets and liabilities (price risks).
Currency-related risk
More than 90% of the net sales of the Volvo
Group are generated in countries other than
Sweden. Changes in exchange rates have a
direct impact on the Volvo Group’s operating
income, balance sheet and cash flow, as well as
an indirect impact on Volvo’s competitiveness,
which over time affects the Group’s earnings.
Credit-related risk
An important part of the Group’s credit risk is
related to how the financial assets of the Group
have been placed. The majority are placed in
interest-bearing bonds issued by Swedish real
estate financing institutions.
Liquidity risk
Volvo ensures its financial preparedness by
always maintaining a certain portion of revenues
in liquid assets.
Market risk from investments in shares or
similar instruments
The Volvo Group is indirectly exposed to market
risks from shares and other similar instruments,
as a result of managed capital transferred to
independent pension plans being partly invested
in instruments of these types.
Operational risk
The profitability depends on successful
new products
The Volvo Group’s long-term profitability depends
on the Company’s ability to successfully launch
and market its new products. Product life cycles
continue to shorten, putting increased focus on
the success of the Group’s product development.
Reliance on suppliers
Volvo purchases raw materials, parts and com-
ponents from numerous external suppliers.
A significant part of the Group’s requirements
for raw materials and supplies is filled by single-
source suppliers. The effects of delivery inter-
ruptions vary depending on the item or compo-
nent. Certain items and components are standard
throughout the industry, whereas others are
internally developed and require unique tools
that are time-consuming to replace.
The Volvo Group’s costs for raw materials and
components can vary significantly over a busi-
ness cycle. Cost variations may be caused by
changes in world market prices for raw materials
or by an inability of our suppliers to deliver.
Intangible assets
AB Volvo owns or otherwise has rights to pat-
ents and brands that refer to the products the
Company manufactures and markets. These have
been acquired over a number of years and are
valuable to the operations of the Volvo Group.
Volvo does not consider that any of the Group’s
operations are heavily dependent on any single
patent or group of patents.
Through Volvo Trademark Holding AB, AB
Volvo and Volvo Car Corporation jointly own the
Volvo brand. AB Volvo has the exclusive right to
use the Volvo name and trademark for its prod-
ucts and services. Similarly, Volvo Car Corpora-
tion has the exclusive right to use the Volvo name
and trademark for its products and services.
The Volvo Group’s rights to use the Renault
brand are restricted to the truck operations only
and are regulated by a license from Renault
s.a.s., which owns the Renault brand.
Complaints and legal actions
The Volvo Group could be the target of com-
plaints and legal actions initiated by customers,
employees and other third parties alleging
health, environmental, safety or business related
issues, or failure to comply with applicable legis-
lation and regulations. Information about legal
proceedings involving entities within the Volvo
Group are found in note 24 Contingent Liabilities.
Even if such disputes are resolved successfully,
without having adverse financial consequences,
they could negatively impact the Group’s reputa-
tion and take up resources that could be used
for other purposes.
Risk related to human capital
A decisive factor for the realization of the Volvo
Group’s vision is our employees and their
knowledge and competence. Future development
depends on the company’s ability to maintain its
position as an attractive employer. To this end,
the Volvo Group strives for a work environment in
which energy, passion and respect for the indi-
vidual are guiding principles. Every year a Group-
wide survey is conducted, and according to the
survey the share of satisfied employees has
been on a high level in recent years.
Short-term risk factors
An increase in demand could potentially result in
delivery disturbances due to suppliers’ financial
instability or shortage of resources.
Uncertainty regarding customers’ access to
the financing of products in emerging markets
might have a negative impact on demand.
Volvo verifies annually, or more frequently if
necessary, the goodwill value of its business
areas and other intangible assets for possible
impairment. The size of the overvalue differs
between the business areas and they are, to a
varying degree, sensitive to changes in the busi-
ness environment. Instability in the business
recovery and volatility in interest and currency
rates may lead to indications of impairment.
The reported amounts for contingent liabili-
ties reflect a part of Volvo’s risk exposure, see
note 24 for contingent liabilities.
Contractual conditions related to take
over bids
Some of AB Volvo’s long term loan agreements
contain conditions stipulating the right for a bond-
holder to request repayment in advance under
certain conditions following a change of the con-
trol of the company. In Volvo’s opinion it has been
necessary to accept those conditions in order to
receive financing on otherwise acceptable terms.
Provisions stipulating that an agreement can be
changed or terminated if the control of the com-
pany is changed are also included in some of the
agreements whereby Renault Trucks’ has been
given the right to sell Renault s.a.s.’ and Nissan
Motor Co. Ltd’s light-duty trucks as well as in
some of the Group’s purchasing agreements.
Further information
Note 27 Personnel contains information concern-
ing rules on severance payments applicable for
the Group Executive Team and certain other sen-
ior executives.
Note 4 and 30 contain information regarding
financial risks as well as goals and policies in
financial risk management.
Further risk information is provided in note 24.
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