Recognition of financial assets and liabilities
Purchases and sales of financial assets and liabilities are recognized on the transaction date. A financial asset is derecognized in the balance sheet when all significant risks and benefits linked to the asset have been transferred to a third party.
The fair value of assets is determined based on valid market prices, when available. If market prices are unavailable, the fair value is determined for each asset using various measurement techniques. Transaction expenses are included in the asset’s fair value, except in cases in which the change in value is recognized in profit and loss. The transaction costs that arise in conjunction with the assumption of financial liabilities are amortized over the term of the loan as a financial cost.
Financial assets at fair value through profit and loss
All of the Volvo Group’s financial assets that are recognized at fair value through profit and loss are classified as held for trading. This includes derivatives to which Volvo Group has decided not to apply hedge accounting as well as derivates that are not part of an evidently effective hedge accounting policy pursuant to IAS 39. Gains and losses on these assets are recognized in profit and loss. Short-term investments that are recognized at fair value mainly comprise interest-bearing financial instruments and these are disclosed in Note 18. Derivatives used for hedging interest rate exposure in the customer financing portfolio are included in this category. Unrealized gains and losses from fluctuations in the fair values of the financial instruments are recognized in net financial items,since it is not practically possible to apply hedge accounting in accordance with IAS 39 due to the large number of contracts that the customer financing portfolio comprises. In applicable cases, when the requirements for hedge accounting are considered to be fulfilled, the Volvo Group will hereafter consider the application of hedge accounting for these kinds of instruments. The Volvo Group intends to hold these derivatives to maturity, which is why, over time, the market valuation will be offset as a consequence of the interest-rate fixing on borrowing and lending for the customer-finance operations, and thus not affect operating income or cash flow.
Refer to note 9 regarding derivatives used for hedging interest rate exposure in the customer financing portfolio recongniced in net financial items.
Financial instruments used for hedging currency risks arising from future firm commercial cash flows are also recognized under this category. Unrealized gains and losses from fluctuations in the fair values of the financial instruments related to a receivable or payable will be recognized in the operating income of the respective segments. All other unrealized gains and losses from fluctuations in the fair values of the financial instruments are reported in the operating income of the segment Group functions and other. When the financial instruments have been realized the income effect is reported within the respective segments. As from January 1, 2013 there will be a change in the presentation of the income statement regarding financial instruments used for hedging currency risks arising from future commercial cashflows, from operating income to other financial income and expenses.
Refer to note 31 Changes in Volvo Group Financial reporting.
Loan receivables and other receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Accounts receivables are recognized initially at fair value, which normally corresponds to the nominal value. In the event that the payment terms exceed one year, the receivable is recognized at the discounted present value. After initial recognition, loans and receivables are measured at amortized cost in accordance with the effective interest method. Gains and losses are recognized in profit and loss when the loans or receivables are divested or impaired, as well as in pace with recognition of accrued interest.
Assessment of impairment requirement – loan receivables and other receivables
Volvo Group performs routine controls to ensure that the carrying amount of assets valued at amortized cost has not decreased, which would result in recognition of an impairment loss in profit and loss. Provisions for doubtful receivables are recognized on an ongoing basis following assessments of a possible change in the ability of customers to pay.
Impairment comprises the difference between the carrying amount and the current value of the estimated future payment flow attributable to the specific asset with consideration to the fair value of any collateral. Discounting of future cash flow is based on the effective interest rate used initially. Initially, the impairment requirement is evaluated for each respective asset. If, based on objective grounds, it cannot be determined that one or more assets are subject to an impairment loss, the assets are grouped in units based, for example, on similar credit risks to evaluate the impairment loss requirement collectively. Individually impaired assets or assets impaired during previous periods are not included when grouping assets for collective assessment. If the conditions that gave rise to the recognition of an impairment loss later prove to no longer be valid the impairment loss is reversed in profit and loss as long as the carrying amount does not exceed the amortized cost at the time of the reversal.
Refer to Notes 15 and 16 for more information regarding Volvo Group’s loan receivables and accounts receivables.
Assets available for sale
This category includes assets available for sale and assets that have not been classified in any of the other categories. These assets are initially measured at fair value including transaction costs. Any change in value is recognized directly in other comprehensive income. The cumulative gain or loss recognized in other comprehensive income is reversed in profit and loss on the sale of the asset. Unrealized declines in value are recognized in other comprehensive income, unless the decline is significant or prolonged. Then the impairment is recognized in profit and loss. If the event that caused the impairment no longer exists, impairment can be reversed in profit and loss if it does not involve an equity instrument.
Earned or paid interest attributable to these assets is recognized in profit and loss as part of net financial items in accordance with the effective interest method. Dividends received attributable to these assets are recognized in profit and loss as Income from other investments.
Volvo Group recognizes shares and participations in listed companies at market value on the balance-sheet date, with the exception of investments classified as associated companies and joint ventures. Holdings in unlisted companies for which a market value is unavailable are recognized at acquisition cost. Volvo Group classifies these types of investments as assets available for sale.
Assessment of impairment – assets available for sale
If assets available for sale are impaired, the impaired amount is the difference between the asset’s cost (adjusted for any accrued interest if applicable) and its fair value. However, if equity instruments, such as shares, are involved, a completed impairment is not reversed in profit and loss. On the other hand, impairments performed on debt instruments (interest-bearing instruments) are wholly or partly reversible in profit and loss, in those instances where an event, proven to have occurred after the impairment was performed, is identified and impacts the valuation of that asset.
Refer to Note 5 for Volvo Group’s holdings of shares and participations in listed companies.
In accordance with IAS 39, derivatives used for the hedging of forecast electricity consumption have been recognized at fair value in the balance sheet. During 2012, Volvo applied hedge accounting for these financial instruments. Unrealized gains and losses from fluctuations in the fair value are debited or credited to a separate component in other comprehensive income to the extent the requirements for cash-flow hedge accounting are fulfilled. Accumulated changes in the value of the hedging instruments are recognized in profit and loss at the same time as the underlying hedged transaction affects the Group’s earnings. The table Changes in other reserves in Note 19, Equity and number of shares disclose how the electricity consumption reserve has changed during the year. When cash-flow hedge accounting is applied for previously entered financial instruments utilized to hedge electricity consumption, Volvo tests for effectiveness. Hedging is considered to be effective when the forecast factors that impact the electricity price agree with forecasts of future electricity consumption and the designated hedging instruments. The hedging relationship is regularly tested up until its maturity date. If the identified relationships are no longer deemed effective, the price fluctuations on the hedging instrument from the last period the instrument was considered effective are recognized in the Volvo Group’s operating income.
During 2012, Volvo Group has applied hedge accounting for financial instruments used to hedge interest and currency risks on loans only for cases when hedge accounting requirements are fulfilled. The changes in the fair value of the hedge instruments outstanding and the changes in the carrying amount of the loan are recognized in profit and loss. For cases where hedge accounting is not considered to be fulfilled, unrealized gains and losses up until the maturity date of the financial instrument will be recognized in net financial items in profit and loss.
In previous years, Volvo Group has applied hedge accounting for certain net investments in foreign operations. The ongoing result of such hedges is recognized as a separate item in other comprehensive income. In the event of a divestment, the accumulated result from the hedge is recognized in profit and loss.
See below for supplementary information on hedge accounting and to Note 4 for information regarding Goals and policies in financial risk management.
|Dec 31, 2012||Dec 31, 2011|
|Financial assets at fair value through profit and loss1)|
|The Volvo Group's outstanding currency risk derivatives - commercial exposure||Note 16||146||146||107||107|
|The Volvo Group's outstanding raw materials derivatives||Note 16||23||23||68||68|
|The Volvo Group's outstanding interest and currency risk derivatives - financial exposure||Note 16||3,525||3,525||3,215||3,215|
|Marketable securities||Note 18||3,130||3,130||6,862||6,862|
|Loans receivable and other receivables|
|Accounts receivable||Note 16||27,349||–||27,699||–|
|Customer financing receivables2)||Note 15||80,989||–||78,699||–|
|Other interest-bearing receivables||Note 16||1,291||–||564||–|
|Financial assets available for sale1)|
|Holding of shares in listed companies||Note 5||347||347||635||635|
|Holding of shares in non-listed companies||Note 5||498||–||555||–|
|Cash and cash equivalents||Note 18||25,759||25,759||30,379||30,379|
|Financial liabilities at fair value through profit and loss1)|
|The Volvo Group's commodity derivatives - commercial exposure||5||5||279||279|
|The Volvo Group's outstanding raw materials derivatives||84||84||134||134|
|The Volvo Group's outstanding interest and currency risk derivatives - financial exposure3)||2,827||2,827||4,341||4,323|
|Financial liabilities valued at amortized cost|
|Long term bond loans and other loans||79,592||85,060||84,286||90,174|
|Short term bank loans and other loans||50,274||49,455||43,159||41,884|
1) IFRS 7 classifies financial instruments based on the degree that market values have been utilized when measuring fair value. All financial instruments measured at fair value held by Volvo are classified as level 2 with the exception of shares and participations, which are classified as level 1 for listed instruments and level 3 for unlisted instruments. Refer to Note 5 for more information regarding valuation principles. None of these individual shareholdings is of significant value for Volvo.
2) Volvo does not estimate the risk premium for the customer financing receivables and chooses therefore not to disclose fair value for this category.
3) Includes a fair value of a loan related to hedge accounting neg 1,495 (neg 1,285), netted against the derivative used to hedge the risk pos 1,477 (1,267). For further information on hedging of currency and interest rate risks on loans see below.
Derecognition of financial assets
Volvo Group is involved in cash enhancement activities such as factoring and discounting. Financial assets that have been transferred are included in full or in part in the reported assets of the Volvo Group dependent on the risk and rewards related to the asset have been transferred to the recipient. In accordance with IAS 39, Financial Instruments, Recognition and Measurement, an evaluation is performed to establish whether, substantially, all the risks and rewards have been transferred to an external party. Where the Volvo Group concludes this is not the case, the portion of the financial assets corresponding to the Volvo Group’s continuous involvement is recognized. When all the risk and rewards are not considered to be transferred the amount is kept on the balance sheet. Transferred financial asset that does not fulfill the requirements for derecognition amount to SEK 0.3 billion (0.6).
Transferred financial assets for which substantially all risks and rewards have been transferred are derecognized. Continuing involvements in these assets are reflected in the Volvo Group’s balance sheet. External credit guarantees relating to these financial assets are recognized to fair value as provisions in the balance sheet and amount to 118.
Volvo Group’s maximum exposure to loss is considered being the total recourse relating to the transferred assets, i.e. the total amount Volvo Group would have to pay in case of default of the customers. This risk exposure is considered not to be material for the Volvo Group as it does not exceed SEK 0.3 billion. This is the total exposure for the Volvo Group but the likelihood for all customers being in default at the same time is considered to be immaterial.
See note 24 Contingent Liabilities for information regarding contingent liabilities for credit guarantees.
Gains, losses, interest income and expenses related to financial instruments
The table below shows how gains and losses as well as interest income and expenses have affected income after financial items in the Volvo Group divided on the different categories of financial instruments.
|Reported in operating income1)||2012||2011|
|SEK M||Gains/losses||Interest income||Interest expenses||Gains/losses||Interest income||Interest expenses|
|Financial assets and liabilities at fair value through profit and loss2)|
|Currency risk contracts-commercial exposure3)||272||–||–||(91)||–||–|
|Loans receivable and other receivables|
|Accounts receivables / trade payables||(125)||–||–||65||–||–|
|Customer financing receivables VFS||23||5,037||–||68||4,862||–|
|Financial assets available for sale|
|Shares and participations for which a market value can be calculated||15||–||–||20||–||–|
|Shares and participations for which a market value cannot be calculated||27||–||–||25||–||–|
|Financial liabilities valued at amortized cost 4)||–||–||(2,373)||–||–||(2,456)|
|Effect on operating income||212||5,037||(2,373)||87||4,862||(2,456)|
|Reported in net financial items5)|
|Financial assets and liabilities at fair value through profit and loss|
|Interest and currency rate risk contracts- financial exposure 6)||294||–||–||(409)||–||–|
|Loans receivable and other receivables||–||3||–||–||3||–|
|Cash and Cash equivalents||–||390||–||–||545||–|
|Financial liabilities valued at amortized cost6)||(227)||–||(2,464)||771||–||(2,642)|
|Effect on net financial items||221||393||(2,464)||586||548||(2,642)|
1) Information is provided regarding changes in provisions for doubtful receivables and customer financing in Notes 15 and 16, Accounts receivable and customer financing receivables, as well as in Note 8, Other financial income and expenses.
2) Accrued and realized interest is included in gains and losses related to Financial assets and liabilities at fair value through profit and loss.
3) Volvo uses forward contracts and currency options to hedge the value of future payment flows in foreign currency. Both unrealized and realized result on currency risk contracts are included in the table. Refer to Note 4, Goals and policies in financial risk management.
4) Interest expenses attributable to financial liabilities valued at amortized cost recognized in operating income include interest expenses for financing operational leasing activities, not classified as financial instruments.
5) In gains, losses, income and expenses related to financial instruments recognized in Net financial items, neg 1 (569) was recognized under other financial income and expenses. Refer to Note 9, Other financial income and expenses for further information. Interest expenses attributable to pensions, 117 (191) are not included in this table.
6) Gains and losses related to changes in foreign currency rates on currency rate risk contracts for financial exposure is 218 (neg 746) and neg 227 (771) for financial liabilities valued at amortized cost. Refer to Note 9, Other financial income and expenses for further information.
|Outstanding derivative instruments for dealing with currency and interest-rate risks related to financial assets and liabilities||Dec 31, 2012||Dec 31, 2011|
|– receivable position||64,825||2,507||76,383||2,757|
|– payable position||74,247||(1,169)||68,046||(2,183)|
|Forwards and futures|
|– receivable position||–||10||7,155||–|
|– payable position||7,470||(34)||6,908||–|
|Foreign exchange derivative contracts|
|– receivable position||21,743||1,003||18,520||227|
|– payable position||19,224||(127)||33,005||(642)|
|– receivable position||367||5||991||231|
|– payable position||74||–||104||–|
|– receivable position||–||–||89||–|
|– payable position||130||(2)||978||(231)|
|Outstanding forward contracts and options contracts for hedging of currency risk and interest risk of commercial receivables and liabilities||Dec 31, 2012||Dec 31, 2011|
|Foreign exchange derivative contracts|
|– receivable position||3,682||141||2,444||54|
|– payable position||303||(4)||5,145||(200)|
|– receivable position||352||5||3,521||53|
|– payable position||–||–||–||–|
|– receivable position||–||–||–||–|
|– payable position||352||(1)||3,532||(79)|
|Raw materials derivative contracts|
|– receivable position||(120)||23||(227)||68|
|– payable position||467||(84)||693||(134)|
Hedge accounting – supplementary information
Hedging of forecast electricity consumption
In 2012, the Volvo Group recognized neg 1 (4) related to the ineffectiveness of the hedging of forecasted electricity.
Hedging of currency and interest rate risks on loans
Fair value of the hedge instruments outstanding amounts to 1,697 (1,484). Changes in fair value of the loan related to hedge accounting amounts to negative 1,495 (neg 1,285). The changes in the fair value of the hedge instruments outstanding and the changes in the fair value of the loan are recognized in net financial positions in profit and loss.
Hedging of net investments in foreign operations
A total of neg 205 (neg 205) was recognized in other comprehensive income relating to hedging of net investments in foreign operations as of December 31, 2012. The loans used as hedging instruments expired during 2011.