Volvo applies the cost method of valuation for measurement of intangible assets. Borrowing costs are included in the cost of assets that necessarily take more than 12 months to prepare for their intended use or sale, known as qualifying assets.
When participating in industrial projects in partnership with other companies, such as the aircraft engine projects in which Volvo Aero participates, Volvo pays an entrance fee to participate in certain cases. These entrance fees are capitalized as intangible assets.
Research and development expenses
Volvo applies IAS 38, Intangible Assets, for the recognition of research and development expenses. Pursuant to this standard, expenditures for the development of new products, production systems and software are recognized as intangible assets if such expenditures, with a high degree of certainty, will result in future financial benefits 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 charged to income as incurred.
Volvo has developed a process for conducting product development 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 industrialization phase, the industrial system is prepared for series production and the product is launched.
Goodwill is recognized as an intangible asset with indefinite useful life. For non-depreciable assets such as goodwill, impairment tests are performed annually, as well as if there are indications of impairments during the year, by calculating the asset’s recovery value. If the calculated recovery value is less than the carrying value, the asset’s recovery value is impaired.
Volvo’s measurement model is based on a discounted cash-flow model, with a forecast period of four to six years. Cash-generating units, identified as Volvo’s business areas, are measured.
Goodwill assets are allocated to these cash-generating units on the basis of anticipated future utility. Measurements are based on management’s best estimation of the operations’ development. The basis for this estimation is long-term forecasts of the market’s growth, 2 to 4%, in relation to the performance of Volvo’s operations. In the model, Volvo is expected to maintain stable capital efficiency over time. Measurements are based on nominal values and utilize a general rate of inflation in line with the European target. Volvo uses a discounting factor calculated to 12% (12) before tax for 2011.
In 2011, the value of Volvo’s operations exceeded the carrying amount of goodwill for all business areas, which is why no impairment was recognized. Volvo has also tested whether a surplus value would still exist after being subjected to reasonable potential changes to the assumptions, negatively adjusted by one percentage point on an individual basis, whereof no adjustment would have sufficient impact to require impairment for the majority of the carrying amount.
Since the surplus values differ between the business areas, they are to a varying degree sensitive to changes in the assumptions described above. Therefore, Volvo continuously follows the performance of the business areas whose overvalue is dependent on the fulfillment of Volvo’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 Volvo are described in the Volvo business area section, as well as in the Risk management section.
Depreciation, amortization and impairment
Depreciation is made on a straight-line basis based on the cost of the assets, adjusted in appropriate cases by impairments, and estimated useful lives. Depreciation is reported in the respective function to which it belongs. Impairment tests for depreciable assets are performed if there are indications of impairment at the balance sheet date.