Volvo 2014 Annual Report Download - page 142

Volvo Group applies the cost method for recognition of intangible assets.
Borrowing costs are included in the cost of assets that are expected to
take more than twelve months to complete for their intended use or sale.
When participating in industrial projects in partnership with other com-
panies the Volvo Group in certain cases pays an entrance fee to partici-
pate. These entrance fees are capitalized as intangible assets.
Research and development expenses
The Volvo Group applies IAS 38 Intangible Assets, for the recognition of
research and development expenses. Pursuant to this standard, expendi-
tures for the development of new products, production systems and soft-
ware are recognized as intangible assets if such expenditures, with a high
degree of certainty, will result in future fi nancial benefi ts 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 recognized in the income statement as incurred.
The Volvo Group has developed a process for conducting product devel-
opment 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 industrial-
ization phase, the industrial system is prepared for serial production and
the product is launched. During 2014 the GDP process has been updated
and is going forward named DVP Project Handbook and still consists of
six different phases. The updated process will not have an impact on the
accounting principles for research and development expenses and will be
applied from 1 January 2015 in the Volvo Group.
Goodwill
Goodwill is recognized as an intangible asset with indefi nite 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 is written down to its
recovery value.
The Volvo Group’s valuation model is based on a discounted cash-fl ow
model, with a forecast period of four years. Valuation is performed on
cash-generating units, identifi ed as the Volvo Group’s business areas.
Each business area is fully integrated ensuring maximum synergy, hence
no independent cash-fl ows exists on a lower level.
Goodwill is allocated to these cash-generating units based on expected
future benefi t from the combination. The valuation is based on a business
plan which is an integral part of the Volvo Group’s fi nancial planning pro-
cess and represents management’s best estimate of the development of
the Group’s operations. Assumption of 2% (2) long-term market growth
beyond the forecast period and the Group’s expected performance in this
environment is a basis for the valuation. In the model, the Volvo Group is
expected to maintain stable capital effi ciency over time. Other parameters
considered in the calculation are operating income, mix of products and
services, expenses and level of capital expenditures. Measurements are
based on nominal values and applies a general rate of infl ation applicable
for the main markets where the Volvo Group operates. The Volvo Group
uses a discounting factor measured at 12% (12) before tax for 2014.
In 2014, the value of Volvo Group’s operations exceeded the carrying
amount of goodwill for all business areas, thus no impairment was recog-
nized. The Volvo Group has also tested whether a negative adjustment of
one percentage point to the aforementioned parameters would result in
impairment for any goodwill value however none of the business areas
would be impaired as a result of this test. The operating parameters applied
in the valuation are based on management’s strategy and indicates higher
value than historical performance for Buses, although as described on
page 22 the cost effi ciency programs are expected to increase the oper-
ating parameters to a level above the ones applied in the valuation.
Furthermore the Volvo Group is operating in a cyclical industry where
performance could vary over time.
The surplus values differ between the business areas and are to a
varying degree sensitive to changes in the assumptions described above.
Therefore, the Volvo Group continuously follows the performance of the
business areas whose surplus value is dependent on the fulfi llment of the
Volvo Group’s assessments. Instability in the recovery of the market and
volatility in interest and currency rates may lead to indications of a need for
impairment. The most important factors for the future operations of the
Volvo Group are described in the Volvo Group business area section, as
well as in the Risk management section.
Amortization and impairment
Amortization 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. Amortization is recognized in the respective function to which it
belongs, meaning that amortization of product development is part of the
research and development expenses in the income statement. Impair-
ment tests for amortizable assets are performed if there are indications of
impairment at the balance sheet date.
Amortization periods
Trademarks 20 years
Distribution networks 10 years
Product and software development 3 to 8 years
ACCOUNTING POLICIES
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 fi nancial 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 fl ows. If the recov-
erable 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 fl ows, which are generally
based on internal business plans or forecasts. While management believes
SOURCES OF ESTIMATION UNCERTAINTY
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NOTE 12 INTANGIBLE ASSETS
FINANCIAL INFORMATION 2014
138