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.

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. The Volvo Group focuses on describing the accounting choices has been made within the framework of the prevailing IFRS policy and avoids repeating the actual text of the standard, unless the Volvo Group 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
  31, Changes in Volvo Group Financial Reporting 2013 IFRS11, IAS28
Investments in associates 5, Investment in associated companies and other shares and participations IAS 28
Operating segments 6, Segment reporting IFRS 8
Revenue 7, Income IAS 17, IAS 18
Shares and participations 5, Investment in associated companies and other 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 36, 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, Equity and numer of shares IAS 33
Pensions and similar obligations 20, Provisions for post-employment benefits  IAS 19
  31, Changes in Volvo Group Financial Reporting 2013 Amendments to IAS19
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 the Volvo Group holds more than 50% of the voting rights or in which Volvo Group otherwise has a controlling interest.
– Joint ventures are companies over which Volvo Group has joint control together with one or more external parties. Up and until December 31, 2012 joint ventures are recognized using the proportionate method of consolidation.
– Associated companies are companies in which Volvo Group has a significant influence, which is normally when Volvo Group’s holding of shares 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 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 the profit or loss statement as a part of the gain/loss arising from the divestment or liquidation of such a company. 

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
as of Dec 31
Country Currency 2012 2011   2012 2011
Brazil BRL  3.4837  3.8850    3.1885  3.7109
Euro Zone EUR  8.7145  9.0430    8.6259  8.9540
Japan JPY  0.0851  0.0817    0.0757  0.0892
Canada CAD  6.7827  6.5694    6.5536  6.7808
China CNY  1.0738  1.0057    1.0456  1.0998
Great Britain GBP  10.7402  10.4179    10.4977  10.6831
South Korea KRW  0.0060  0.0059    0.0061  0.0060
United States USD  6.7767 6.4982    6.5169  6.9247

New accounting principles for 2012
None of the new accounting principles or interpretations effective from January 1, 2012 has had any significant impact on the Volvo Group’s financial statements.

New disclosure requirements in accordance with the amendement of IFRS 7 Disclosures - Transfers of Financial Assets are presented in note 30.

The Swedish Financial Reporting Board has published an amendment in RFR 2 regarding group contribution which is effective for the annual period beginning January 1, 2013. This amendment has been early adopted by the parent company in 2012. AB Volvo applies the alternative rule and group contributions are recognized as allocations in the income statement. Previously, group contributions were recognized as income from investments in group companies. The comparative numbers in the 2011 income statement for the parent company have been adjusted.

Other amendments in RFR 2 effective from January 1, 2012 have not had any significant impact on the parent company’s financial statements.

New accounting principles for 2013 and later
When preparing the consolidated financial statements as of December 31, 2012, a number of standards and interpretations has been published, but has not yet become effective. See note 31 for information related to Amendment to IAS 19 Employee benefits and IFRS 11 Joint Arrangements and restated income statement and balance sheet for 2012 in accordance with the two above mentioned standards.

Read more in Note 31 regarding changes in the financial reporting as from January 1, 2013.

The following is an assessment of the effect that the implementation of other new standards and statements could have on the Volvo Group’s financial statements.

IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosures of Interests in Other Entities
Volvo Group will apply IFRS 10 Consolidated Financial Statement, IFRS 11 Joint Arrangements and IFRS 12 Disclosures of Interests in Other entities in advance as from January 1, 2013. Comparative periods 2012 are restated.

IFRS 10 replaces the consolidation instructions in IAS 27 Consolidated and Separate Financial Statements and SIC -12 Consolidation – Special Purpose Entities and introduce one basis for consolidation, that is control. If the following three criterias are fulfilled control is obtained (i) power of the investee (ii) exposure, or rights, to variable returns from its involvement with the investee, and (iii) the ability to use power over the investee to affect the amount of the return. IFRS 10 is not considered to have any significant impact on the consolidation of other companies of which the Volvo Group has ownership or is involved.

Refer to Note 31 for further information related to IFRS 11 Joint Arrangements.

IFRS 12 Disclosure of Interests in Other Entities
Disclosure of Interests in Other Entities requires more detailed disclosures on subsidiaries, joint arrangements, associates and any unconsolidated structured entities in which the company is involved. The disclosures in the annual report will to some extent increase due to IFRS 12.

IAS 27 Separate Financial Statements (revised 2011)
IAS 27 has been amended for the issuance of IFRS 10, but retains the current guidance for separate financial statements. The amendments in IAS 27 are effective from January 1, 2013, but are not considered to have any material effect on the Volvo Group.

IAS 28 Investments in Associates and Joint Ventures (revised 2011)
In connection with the issuance of IFRS 10 and IFRS 11, consequential amendments have been made in IAS 28. The amendments in IAS 28 are effective from January 1, 2013. According to IFRS 11, joint ventures are recognized according to the equity method in IAS 28.

Read more in Note 31 regarding recognition of Joint Ventures as from January 1, 2013.

IFRS 13 Fair Value Measurement
IFRS 13 establishes a single source of guidance for fair value measurement and disclosures of fair value measurements. IFRS 13 does not change the requirement regarding which items should be measured or disclosed at fair value. The standard is to be applied prospectively and comparative disclosures is not required. IFRS 13 requires us to take into account factors that are specific to the transaction and to the asset or liability. In many cases, the transaction price will equal the fair value.

The scope of IFRS 13 applies to all transactions and balances (financial or non-financial) for which IFRSs require or permit fair value measurements, except for share-based payment transactions and leasing transactions. IFRS 13 is effective from January 1, 2013. The standard is not considered to have a material effect on Volvo Group.

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 Group is currently conducting a review of how the implementation of IFRS 9 will impact the Volvo Group. A joint position will be taken in conjunction with the final version of all three components of the project being published.

Other new standards and amendments are not considered to have a material impact on the Volvo Group's financial statements.

* This standard has not been adopted by the EU when this Annual Report was published. The date listed for application may thus be subject to change due to decisions made during the EU approval process.