Scania Annual Report 2011

90
notes to the consolidated financial statements
NOTE 1 Accounting principles, continued
Hedge accounting
Scania is exposed to various financial risks in its operations. In order to
hedge currency rate risks and interest rate risks, derivatives are mainly
used. For accounting purposes, cash flow hedging is used for hedgin g
of currency rate risks. Scania’s external financing occurs mainly via
diffe rent borrowing programmes. To convert this borrowing to the desired
interest rate refixing structure, interest rate derivatives are used.
To the extent that hedging of borrowings with variable interest rates is
used, derivatives are recognised according to cash flow hedging rules.
In those cases where hedging of borrowings with fixed interest rates is
used, derivatives are recognised according to fair value hedging rules.
Due to the very strict requirements in order to apply hedge accounting,
Scania has chosen not to apply hedge accounting to all hedging
transactions. In cases where hedge accounting is not applied, because
of the separate treatment of derivatives, which are carried at market
value, and liabilities, which are carried at accrued cost, accounting
volatility arises in net financial items. Financially speaking, Scania considers
itself hedged and its risk management adheres to the Financial
Policy approved by the Board of Directors.
Cash flow hedging
Hedging instruments, primarily currency futures that were acquired for
the purpose of hedging expected future commercial payment flows
in foreign currencies (hedged items) against currency rate risks are
recognised according to cash flow hedging rules. This implies that all
derivatives are accounted for in the balance sheet at fair value, and
changes in the value of futures contracts are recognised under “Other
comprehensive income” and accumulate in a hedge reserve in equity.
Amounts that have been recognised in the hedge reserve in equity are
recognised in the income statement at the same time as the payment
flows reach the income statement.
Hedging instruments, primarily interest rate swaps that were
acquire d for the purpose of hedging future interest flows, are
recognise d according to cash flow hedging rules. This means that
borrowings with variable interest rate are converted to a fixed interest
rate. The derivative is recognised in the balance sheet at fair value, and
changes in value are recognised under “Other comprehensive income”
and accumulated in the hedge reserve in equity. The interest portions
of the derivative are recognised continuously in the income statement
and thus affect net financial items in the same period as interest payments
on the borrowings. Any gain or loss attributable to an inefficient
portion is immediately recognised in the income statement.
Fair value hedging
Hedging instruments, primarily interest rate derivatives that eliminate
the risk that changes in the market interest rate will affect the value
of the liabilities (hedged item), are recognised according to fair value
hedging rules. In these hedging relationships, the hedging instrument
i.e. the derivative, is carried at fair value and the hedged item, i.e. the
borrowing, is carried at fair value with regard to the risk that has been
hedged. This means that the change in value of the derivative instrument
and that of the hedged item match in net financial items.
Hedging of net investments outside Sweden
Currency rate risk related to net investments in subsidiaries outside
Sweden that have a functional currency different from that of the
Parent Company is hedged to the extent that the subsidiary is overcapitalised
or has sizeable monetary assets that will not be utilised
in its operations. Hedging occurs by using derivatives as hedging
instruments. Translation differences on financial instruments used as
hedging instruments are recognised including tax effects under “Other
comprehensive income” and accumulate in the currency translation
reserve in equity, provided that the hedge is efficient. This effect thus
matches the translation differences that arise in equity when trans lating
the accounts of the subsidiary outside Sweden into the functional
currency of the Parent Company.
Provisions
Provisions are reported if an obligation, legal or informal, exists as a
consequence of events that occur. It must also be deemed likely that
an outflow of resources will be required to settle the obligation and
that the amount can be reliably estimated. Provisions for warranties for
vehicles sold during the year are based on warranty conditions and the
estimated quality situation. Provisions on service contracts are related
to expected future expenses that exceed contractual future revenue.
Provisions for residual value obligations arise as a consequence either
of an operating lease (Scania as lessor) or a delivery with a repurchase
obligation. The provision must cover the current assessment that
expected future market value will be below the price agreed in the
lease contract or repurchase contract. In this case, a provision for the
difference between these amounts is to be reported, to the extent that
this difference is not less than an as yet unrecognised deferred gain.
Assessment of future residual value risk occurs continuously over the
contract period. For provisions related to pensions, see the descriptio n
under “Employee benefits” below and in Note 17, “Provisions for
pension s and similar commitments”. For provisions related to deferred
tax liabilities, see below under “Taxes”.
Taxes
The Group’s total tax consists of current tax and deferred tax. Deferred
tax is recognised in case of a difference between the carrying amount
of assets and liabilities and their fiscal value (“temporary difference”).
Deferred tax assets minus deferred tax liabilities are recognised only
to the extent that it is likely that they can be utilised. The tax effect
attributable to items recognised under “Other comprehensive income”,
such as changes in actuarial gains/losses, is recognised together with
the underlying item under “Other comprehensive income”.
financial reports Scania 2011