Volvo 2012 Annual Report Download - page 136

Carrying
value
as of
Dec 31,
2011 Provisions Reversals Utilizations
Acquired
and
divested
companies
Translation
differ-
ences
Other
reclassi-
fications
Carrying
value
as of
Dec 31,
2012
Of which
due within
12 months
Of which
due after
12 months
Warranties 8,652 7,687 (738) (6,036) (3) (326) (347) 8,889 5,530 3,359
Provisions in insurance
operations 488 160 (17) (232) 0(22) 0377 377 0
Restructuring measures 199 1,300 (60) (305) 0(38) 10 1,106 718 388
Provisions for residual
value risks 741 220 (67) (157) 0(19) 14 732 308 424
Provisions for service
contracts 380 321 (64) (217) 0(9) (22) 389 213 176
Dealer bonus 2,033 3,359 (105) (2,893) 0(63) (60) 2,271 2,189 82
Other provisions 2,686 3,400 (733) (2,609) 97 (166) 320 2,995 1,641 1,354
B/S Total 15,179 16,447 (1,784) (12,449) 94 (643) (85) 16,759 10,976 5,783
Long-term provisions as above is expected to be settled within 2 to 3 years.
Read more in Note 8 regarding restructuring.
SOURCES OF ESTIMATION UNCERTAINTY
!Provision for product warranty
Warranty provisions are estimated with consideration of historical claims
statistics, the warranty period, the average time-lag between faults occurr ing
and claims to the company and anticipated changes in quality indexes.
Estimated costs for product warranties recognized as cost of sales when
the products are sold. Estimated warranty costs include contractual warranty
and goodwill warranty (warranty cover in excess of contractual warranty or
campaigns which is accepted as a matter of policy or normal practice in
order to maintain a good business relation with the customer). Differences
between actual warranty claims and the estimated claims generally affect
the recognized expense and provisions in future periods. Refunds from
suppliers, that decrease Volvo Group’s warranty costs, are recognized to
the extent these are considered to be certain. As of December 31, 2012
warranty cost provisions amounted to 8,889 (8,652).
Legal proceedings
The Volvo Group recognizes obligations as provisions or other liabilities
only in cases where Volvo Group has a present obligation from a past
event, where a financial responsibility is probable and Volvo Group can
make a reliable estimate of the size of the amount. When these criteria are
not met, a contingent liability may be recognized.
The Volvo Group regularly reviews the development of significant out-
standing legal disputes in which the Volvo Group companies are parties, both
civil law and tax disputes, in order to assess the need for provisions and
contingent liabilities in the financial statements. Among the factors that Volvo
Group considers in making decisions on provisions and contingent liabilities
are the nature of the dispute, the amount claimed, the progress of the case,
the opinions or views of legal counsels and other advisers, experience in
similar cases, and any decision of Volvo Group’s management as to how the
Volvo Group intends to handle the dispute. The actual outcome of a legal
dispute may deviate from the expected outcome of the dispute. The differ-
ence between actual and expected outcome of a dispute might materially
affect future financial statements, with an adverse impact upon the Volvo
Group’s results of operation, financial position and liquidity.
Read more about the Volvo Group’s gross exposure for contingent liabilities in
Note 24.
Residual value risks
In the course of its operations, the Volvo Group is exposed to residual value
risks through operating lease agreements and sales combined with repur-
chase agreements. Residual value commitments amount to 15,906 (14,349)
at December 31, 2012. Residual value risks are reflected in different ways in
the the Volvo Group consolidated financial statements depending on the
extent to which the risk remains with the Volvo Group.
In cases where significant risks pertaining to the product remain with the
Volvo Group, the products, primarily trucks, are generally recognized in the
balance sheet as assets under operating leases. Depreciation for these
products are recognized on a straight-line basis over the term of the commit-
ment and the depreciable amount is adjusted to agree with estimated net
realizable value at the end of the commitment. The estimated net realizable
value of the products at the end of the commitments is monitored individually
on a continuing basis. A decline in prices for used trucks and construction
equipment may negatively affect the Volvo Group’s operating income. High
inventories in the truck industry and the construction equipment industry
and low demand may have a negative impact on the prices of new and used
trucks and construction equipment. In monitoring estimated net realizable
value of each product under a residual value commitment, management
makes consideration of current price-level of the used product model, value
of options, mileage, condition, future price deterioration due to expected
change of market conditions, alternative distribution channels, inventory
lead-time, repair and reconditioning costs, handling costs and overhead
costs in the used product division are more. Additional depreciations and
estimated impairment losses are immediately recognized in the Income
Statement.
The total risk exposure for assets under operating lease is regognized
as current and non-current residual value liabilities.
Read more about residual value risks for liabilities in Note 22.
If the residual value risk commitment is not significant, independent from the
sale transaction or in combination with a commitment from the customer to
buy a new product in connection to a buy-back option, the asset is not recog-
nized on the balance-sheet. Instead, the risk exposure is reported as a residual
value provision equivalent to the estimated residual value risk.
To the extent the residual value exposure does not meet the definition
of a provision, the remaining residual value risk exposure is reported as a
contingent liability.
Read more about contingent liabilities in Note 24.
NOTES TO FINANCIAL STATEMENTS
FINANCIAL INFORMATION 2012
132