Volvo 2013 Annual Report Download - page 130

Goals and policies in fi nancial risk management (cont.)
CREDIT RISKS
Credit risks are defi ned as the risk that the Volvo Group does not receive
payment for recognized accounts receivable and customer-fi nancing
receivables (commercial credit risk), that the Volvo Group’s investments
are unable to be realized (fi nancial credit risk) and that potential profi t is
not realized due to the counterparty not fulfi lling its part of the contract
when using derivative instruments (fi nancial counterparty risk).
POLICY
The objective of the Volvo Group Credit Policy is to defi ne and measure
the credit exposure and control the risk of losses deriving from credits to
customers, credits to suppliers, counter party risks and Customer Dealer
Financing activities.
Commercial credit risk
The Volvo Group’s credit granting is steered by Group-wide policies and
customer-classifi cation rules. The credit portfolio should contain a distri-
bution among different customer categories and industries. The credit
risks are managed through active credit monitoring, follow-up routines and,
where applicable, product repossession. Moreover, regular monitoring
ensures that the necessary allowances are made for incurred losses on
doubtful receivables. In Notes 15 and 16, ageing analyses are presented of
customer fi nance receivables overdue and accounts receivables overdue
in relation to the reserves made.
The customer-fi nancing receivables in the Volvo Group’s customer-
fi nancing operations amounted at December 31, 2013 to approximately
net SEK 84 billion (81). The credit risk of this portfolio is distributed over
a large number of retail customers and dealers. Collaterals are provided in
the form of the fi nanced products. In the credit granting the Volvo Group
strives for a balance between risk exposure and expected return.
Read more about Volvo’s credit risk in the customer-fi nancing operation in
Note 15.
The Volvo Group’s accounts receivables amounted as of December 31,
2013 to approximately net SEK 29 billion (27).
Financial credit risk
The Volvo Group’s fi nancial assets are largely managed by Volvo Treasury
and invested in the money and capital markets. All investments must meet
the requirements of low credit risk and high liquidity. According to the Volvo
Group’s credit policy, counterparties for investments and derivative trans-
actions should have a rating better or equivalent to A from one of the
well-established credit rating institutions.
Liquid funds and marketable securites amounted as of December 31,
2013 to approximately SEK 30 billion (28).
Read more about Volvo Group’s Marketable securities and liquid funds in
Note 18.
Financial counterparty risk
The use of derivatives involves a counterparty risk, in that a potential gain
will not be realized if the counterparty fails to fulfi ll its part of the contract.
To reduce the exposure, the Volvo Group enters into master netting
agreements (primarily so called ISDA agreements) with all counterpart
eligible for derivative transactions. The netting agreements provide the
possibility for assets and liabilities to be set off under certain circum-
stances, such as in the case of the counterpart’s insolvency. These net-
ting agreements have no effect on profi t, loss or the position of the Volvo
Group, since derivative transactions are accounted for on a gross-basis,
with the exception of the derivatives described in footnote 3, under the
table on page 161 in note 30. Counterparty risk exposure for derivatives
is also limited through weekly cash transfers corresponding to the value
change of open contracts. The Volvo Group’s gross exposure from posi-
tive derivatives, amounting to SEK 3,713 M (5,148) is reduced by 41%
(43%) to SEK 2,203 M (2,948) by netting agreements and cash deposits,
so called CSA agreements. The Volvo Group is actively working with limits
per counterpart in order to reduce risk for high net amounts towards indi-
vidual counterparts.
Read more about the Volvo Group’s gross exposure from positive derivatives
per type of instrument in note 30 on page 163.
INTEREST-RATE RISKS CURRENCY RISKS CREDIT RISKS
FINANCIAL RISKS
OTHER PRICE RISKSLIQUIDITY RISKS
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FINANCIAL INFORMATION 2013
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