The consolidated financial statements for AB Volvo and its subsidiaries have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), as adopted by the EU. The portions of IFRS not adopted by the EU have no material impact on this report. This Annual Report is prepared in accordance with IAS 1 Presentation of Financial Statements and with the Swedish Companies Act. In addition, RFR 1 Supplementary Rules for Groups, has been applied, which is issued by the Swedish Financial Reporting Board. As of 2005, Volvo has applied International Financial Reporting Standards (IFRS) in its financial statements. In accordance with the IFRS transitions rules in IFRS 1, Volvo applies retrospective application from the IFRS transition date at January 1, 2004. The details of the transition from Swedish GAAP to IFRS are set out in Note 3 in the annual reports of 2005 and 2006. Refer to the 2004 Annual Report for a description of the previous Swedish accounting policies applied by Volvo.

How should Volvo's accounting policies be read?

Volvo describes the accounting policies in conjunction with each note in the aim of providing enhanced understanding of each accounting area. Volvo focuses on describing the accounting choices that the Group has made within the framework of the prevailing IFRS policy and avoids repeating the actual text of the standard, unless Volvo considers it particularly important to the understanding of the note’s content. Refer to the table below to see the note in which each accounting policy is listed and for the relevant and material IFRS standard.

Accounting principle Note IFRS-standard
Non-current assets held for sale  3, Acquisitions and divestments of shares  IFRS 5
and discontinued operations in subsidiaries  
Joint ventures 5, Shares and participations IAS 31
Investments in associates 5, Shares and participations IAS 28
Operating segments 6, Segment reporting IFRS 8
Revenue 7, Income IAS 17, IAS 18
Shares and participations 5, Shares and participations IAS 28, IAS 32, IAS 36, IAS 39
Financial income and expenses 9, Other financial income and expenses IAS 39
Income taxes 10, Income taxes IAS 12
Minority interests 11, Minority interests IAS 27
Research and development expenditure 12, Intangible assets IAS 38
Intangible assets 12, Intangible assets IAS 36, IAS 38
Tangible assets 13, Tangible assets IAS 16, IAS 40
Leasing 14, Leasing IAS 17
Customer-financing receivables 15, Customer-financing receivables IAS 17, IAS 18, IAS 39, IFRS 7
Inventories 17, Inventories IAS 2
Earnings per share 19, Shareholder's equity IAS 33
Pensions and similar obligations 20, Provisions for post-employment benefits IAS 19
Provisions for residual value risks 21, Other provisions IAS 17, IAS 18, IAS 37
Warranty expenses 21, Other provisions IAS 37
Restructuring costs 21, Other provisions IAS 37
Liabilities 22, Liabilities IAS 37, IAS 39, IFRS 7
Contingent liabilities 24, Contingent liabilities IAS 37
Transactions with related parties 25, Transactions with related parties IAS 24
Government grants 26, Government grants IAS 20
Share-based payments 27, Personnel IFRS 2
Cash-flow statement 29, Cash flow IAS 7
Financial instruments 4, Goals and policies in financial risk management IAS 32, IAS 39, IFRS 7
  16, Receivables  
  18, Marketable securities and liquid funds  
  30, Financial instruments  

Consolidated financial statements
Principles for consolidation
The consolidated financial statements have been prepared in accordance with the principles set forth in IAS 27, Consolidated and Separate Financial Statements. Accordingly, intra-Group transactions and gains on transactions with associated companies are eliminated. The consolidated financial statements comprise the Parent Company, subsidiaries, joint ventures and associated companies.

– Subsidiaries are defined as companies in which Volvo holds more than 50% of the voting rights or in which Volvo otherwise has a controlling interest.
– Joint ventures are companies over which Volvo has joint control together with one or more external parties. Joint ventures are recognized using the proportionate method of consolidation.
– Associated companies are companies in which Volvo has a significant influence, which is normally when Volvo’s holdings correspond to at least 20% but less than 50% of the voting rights. Holdings in associated companies are recognized in accordance with the equity method.

Translation to Swedish kronor when consolidating companies using foreign currencies
AB Volvo’s functional currency is the Swedish krona (SEK). The functional currency of each Volvo Group company is determined based on the primary economic environment in which it operates. The primary economic environment is normally the one in which the company primarily generates and expends cash. In most cases, the functional currency is the currency of the country where the company is located. AB Volvo’s and the Volvo Group’s presentation currency is SEK. In preparing the consolidated financial statements, all items in the income statements of foreign subsidiaries and joint ventures (except for subsidiaries in hyperinflationary economies) are translated to SEK at monthly exchange rates. All balance-sheet items are translated at exchange rates at the respective year-ends (closing rate). The differences in consolidated shareholders’ equity, arising from variations between closing rates for the current and preceding year are charged or credited directly to other comprehensive income as a separate component.

The accumulated translation difference related to a certain subsidiary, joint venture or associated company is reversed to profit or loss as a part of the gain/loss arising from the divestment or liquidation of such a company.

IAS 29, Financial Reporting in Hyperinflationary Economies, is applied to financial statements of subsidiaries operating in hyperinflationary economies. Volvo’s method of recognition is based on cost. Translation differences due to inflation are charged against earnings for the year. Currently, Volvo has no subsidiaries with a functional currency that could be considered a hyperinflationary currency.

Receivables and liabilities in foreign currency
Receivables and liabilities in foreign currency are measured at closing rates. Translation differences on operating assets and liabilities are recognized in operating income, while translation differences arising in financial assets and liabilities are charged to other financial income and expenses. Financial assets and liabilities are defined as items included in the net financial position of the Volvo Group (see Definitions at the end of this report). Derivative financial instruments used for hedging of exchange and interest risks are recognized at fair value. Gains on exchange rates are recognized as receivables and losses on exchange rates are recognized as liabilities. Depending on the lifetime of the financial instrument, the item is recognized as current or non-current in the balance sheet. Exchange rate differences on loans and other financial instruments in foreign currency, which are used to hedge net assets in foreign subsidiaries and associated companies, are offset against translation differences in the shareholders’ equity of the respective companies. Exchange-rate gains and losses on assets and liabilities in foreign currencies, both on payments during the year and on measurements at year-end, impact profit or loss in the year in which they are incurred. The more important exchange rates applied are shown in the table.

Exchange rates   Average rate   Closing rate
Country Currency 2011 2010   2011 2010
Brazil BRL  3.8850  4.0925    3.7109  4.0560
Canada CAD  6.5694  6.9973    6.7808  6.8085
China CNY  1.0057  1.0643    1.0998  1.0300
Denmark DKK  1.2137  1.2823    1.2044  1.2086
Euro zone EUR  9.0430  9.5502    8.9540  9.0113
Great Britain GBP  10.4179  11.1319    10.6831  10.5538
Japan JPY  0.0817  0.0823   0.0892  0.0835
Norway NOK  1.1596  1.1926    1.1515  1.1530
South Korea KRW  0.0059  0.0062    0.0060  0.0060
United States USD  6.4982  7.2060    6.9247  6.8038

New accounting principles for 2011
None of the new accounting principles or interpretations that came into effect as of January 1, 2011 has had any significant impact on the Volvo Group’s financial statements.

New accounting principles for 2012 and later
When preparing the consolidated financial statements as of December 31, 2011, a number of standards and interpretations has been published, but has not yet become effective. The following is a preliminary assessment of the effect that the implementation of these standards and statements could have on the Volvo Group’s financial statements.

Amendment to IAS 19 Employee benefits*
As from January 1, 2013 the amendment to IAS 19, Employee benefits will become effective. The revised standard is applied retrospectively, and hence the closing balance for 2011 will be adjusted in accordance with revised IAS 19 and the reported numbers for 2012 will be restated accordingly for comparison reason.

The amended standard removes the option to use the corridor method currently used by the Volvo Group. Discount rate will be used when calculating the net interest income or expense on the net defined benefit liability (asset), hence the expected return will no longer be used. All changes in the net defined benefit liability or asset will be recognized when they occur. Service cost and net interest will be recognized in profit and loss while remeasurements such as actuarial gains and losses will be recognized in other comprehensive income.

In accordance with IAS 19 revised, the recognized pension liability will increase by approximately SEK 12 billion as the unrecognized part of the pension liability no longer can be reported off balance. Shareholders’ equity will decrease by approximately SEK 8 billion net of deferred taxes in the opening balance for 2012 in accordance with IAS 19 revised. Net financial position including post-employment benefits would increase by SEK 12 billion while the equity ratio would decrease. Further changes in the net defined benefit liability will be the modified net interest calculation and the removal of the amortisation of actuarial gains and losses.  

Off-balance Unrecognized actuarial gains and losses Effect on operating income of amortization of unrecognized actuarial losses
Dec 31, 2009 SEK 9 billion -
Dec 31, 2010 SEK 7 billion SEK 420 M
Dec 31, 2011 SEK 12 billion SEK 335 M

For the Swedish part of the net pension liability there are still some uncertainties regarding the accounting for Swedish special payroll tax and Swedish yield tax. Swedish special payroll tax’ assignable to the amount reported as the corridor for the Swedish entities amounts to approximately SEK 1 billion. In the opening balance for 2012 in accordance with IAS 19 revised, this will likely be reported as an increase of the recognized pension liability and in shareholders' equity net of deferred taxes.

For further information of provision for post-employment benefit, see note 20.

IFRS 10 Consolidated Financial Statements*, IFRS 11 Joint Arrangements* and IFRS 12 Disclosures of Interests in Other Entities* applicable from January 1, 2013.
replaces the consolidation instructions in IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation – Special Purpose Entities and aims to implement a consolidation policy based on control, defined as the extent to which the owner (i) has control of the investment object, (ii) receives, or is entitled to, variable returns from his/her involvement in the investment object and (iii) has the ability to exercise his/her control of the investment object to influence the size of the return.

IFRS 11 replaces IAS 31 Interests in Joint Ventures and implements new accounting requirements for joint ventures. The ability to apply the proportionate method used by Volvo when recognizing jointly controlled companies will be abolished, meaning that the equity method will remain for the type of joint ventures that Volvo has. Hereafter Volvo will not consolidate the assignable part item by item, the assignable part will be shown as income from investments in associated companies. The equity interest of the joint ventures result will be affect the investment in joint ventures in the balance sheet. 

IFRS 12 Disclosure of Interests in Other Entities requires more detailed disclosure reports on subsidiaries, associated companies and non-consolidated structured companies, in which the company is involved.

Volvo is currently conducting a full analysis of the significance of these standards and how they will affect Volvo. Although the standards are considered to change the recognition of joint ventures, they are not considered to have any significant impact on the consolidation of other companies of which Volvo has ownership or is involved. The scope of the disclosures will probably increase in this area due to IFRS 12.

IFRS 9 Financial instruments*
IFRS 9 is published in three parts: Classification and Measurement, Impairment and Hedge Accounting, which will replace the current IAS 39 with application not earlier than January 1, 2015. Prior application is voluntary, subject to EU approval. Volvo is currently conducting a review of how the implementation of IFRS 9 will impact the Group. A joint position will be taken in conjunction with the final version of all three components of the project being published.

* These standards/interpretations had not been adopted by the EU when this Annual Report was published. The dates listed for application may thus be subject to change due to decisions made during the EU approval process.