Scania Annual Report 2011

94
notes to the consolidated financial statements
NOTE 2 Key judgements and estimates
The key judgements and estimates for accounting purposes that are
discussed in this section are those that Group Management and the
Board of Directors deem the most important for an understanding of
Scania’s financial reports, taking into account the degree of significant
influence and uncertainty. These judgements are based on historical
experience and the various assumptions that Management and the
Board deem reasonable under the prevailing circumstances. The
conclusions drawn in this way provide the basis for decisions regardin g
recognised values of assets and liabilities, in those cases where these
cannot easily be established through information from other sources.
Actual outcomes may diverge from these judgements if other assumptions
are made or other conditions emerge. Note 1 presents the
accounting principles the company has chosen to apply. Important
estimates and judgements for accounting purposes are attributable to
the following areas.
Obligations
Scania delivers about 10 percent of its vehicles with residual value
obliga tions or repurchase obligations. These are recognised as operating
lease contracts, with the consequence that recognition of revenue
and earnings is allocated over the life of the obligation.
If there are major downturns in the market value of used vehicles,
this increases the risk of future losses when divesting the returned
vehicles. When a residual value guarantee is deemed likely to result
in a future loss, a provision is recognised in those cases where the
expected loss exceeds the profit on the vehicle not yet recognised as
revenue.
Changes in market value may also cause an impairment loss in
used vehicle inventories, since these are recognised at the lower of
cost and estimated net realisable value.
At the end of 2011, obligations related to residual value or
repurchas e amounted to SEK 7,762 m. (6,522).
Credit risks
In its Financial Services operations, Scania has an exposure in the
form of contractual payments. At the end of 2011, these amounted to
SEK 42,235 m. (36,137). In all essential respects, Scania has collateral
in the form of the right to repossess the underlying vehicle. In case
the marke t value of the collateral does not cover the exposure to the
custome r, and the customer has a problem completing its contractua l
payments, Scania has a risk of loss. On 31 December 2011, the
reserve for doubtful receivables in Financial Services operations
amounted to SEK 745 m. (817). See also “credit risk exposure” under
Note 30, “Financial instruments and financial risk management”.
Intangible assets
Intangible assets at Scania are essentially attributable to capitalised
product development expenditures and “acquisition goodwill”. All
goodwill items at Scania stem from acquisitions of previously independent
importers/dealerships. All goodwill items are subject to an annual
impairment test, which is mainly based on recoverable amounts,
including important assumptions on the sales trend, margin and
discount rate before tax; see also below. In the long term, the increase
in sales of Scania’s products is deemed to be closely correlated with
economic growth (GDP) in each respective market, which has been
estimated at between 2 and 5 percent. The revenue/cost ratio, or
margi n, for both vehicles and service is kept constant over time
compared to the latest known level. When discounting to present
value, Scania uses its average cost of equity (currently 11 percent
before taxes).
These assumptions do not diverge from information from external
information sources or from earlier experience. To the extent the above
parameters change negatively, an impairment loss may arise. On 31
December 2011, Scania’s goodwill amounted to SEK 1,144 m. (1,167).
The impairment tests that were carried out showed that there are
ample margins before impairment losses will arise.
Scania’s development costs are capitalised in the phase of product
development where decisions are made on future production and
market introduction. At that time there is future predicted revenue and
a corresponding production cost. In case future volume or the price
and cost trend diverges negatively from the preliminary calculation, an
impairment loss may arise. Scania’s capitalised development costs
amounted to SEK 1,292 m. (1,074) on 31 December 2011.
Pension obligations
In the actuarial methods that are used to establish Scania’s pension
liabilities, a number of assumptions are highly important. The most
critical ones are related to the discount rate on the obligations and
expected return on managed assets. Other vital assumptions are
the estimated pace of wage and salary increases and estimated life
expectancy. A higher discount rate decreases the recognised pension
liability. In calculating the Swedish pension liability, as in 2010 and
2009, the discount rate used was 4.0 percent. Changes in the
above-mentioned actuarial parameters are recognised in “Other
comprehensive income”, net after taxes.
financial reports Scania 2011