Scania annual report 2006 97 Fair value of financial instruments The carrying amounts of interest-bearing assets and liabilities in the balance sheet may diverge from their fair value, among other things as a consequence of changes in market interest rates. To establish the fair value of financial assets and liabilities, official market quotations have been used for those assets and liabilities that are traded in an active market. In those cases where market quotations do not exist, fair value has been established by discounting future payment flows at current market interest rates and exchange rates for similar instruments. Fair value of financial instruments such as trade receivables, trade payables and other non-interest-bearing financial assets and liabilities that are recognised at accrued cost minus any impairment losses, is regarded as coinciding with the carrying amount. Financial assets and liabilities already determined from the beginning as belonging to the category of being recognised at fair value are not shown in the table, since Scania has no instruments classified in this category. IA S 32 requires gross reporting instead of netting of financial assets and liabilities. As a result, since 2005 Scania has applied gross reporting of certain financial assets and liabilities that were previously recognised as a net amount. IA S 39 has led to changes in the valuation of financial assets and liabilities, of which the recognition of derivatives has had the greatest impact on Scania. Since 2005, Scania has carried all derivatives at fair value; this was not previously done. The main reason why the fair value of interest-bearing assets and liabilities was less than the carrying amount is that general interest rates were higher at year-end than when the contracts were entered into. Impairment losses for these assets occur only when there is reason to believe that the counterparty will not fulfil its contractual obligations, not as a consequence of changes in market interest rates. The fair value and carrying amount of financial liabilities for which hedge accounting is applied will differ. The reason for this is that Scania applies hedge accounting on interest rate risk excluding Scania’s risk premium, whereas the fair value calculation takes risk premium into account. Continued on next page 2006 2005 Carrying amount Fair value Carrying amount Fair value Financial assets Financial assets held for trading, carried at fair value 1,072 1,072 835 835 – Of which, derivatives for which hedge accounting is not applied 144 1 144 260 1 260 – Of which, interest-related derivates for which fair value hedge accounting is applied 320 1 320 530 1 530 – Of which, currency derivatives related to commercial exposure for which cash flow hedge accounting is applied 131 1 131 45 1 45 – Of which, other financial assets carried at fair value 477 1 477 0 0 Held-to-maturity investments 32 2 32 29 2 29 Loan and trade receivables 43,475 3 42,783 34,559 3 34,659 Total financial assets 4 44,579 43,887 35,423 35,523 Financial liabilities Financial liabilities held for trading, carried at fair value 348 348 577 577 – Of which, derivatives for which hedge accounting is not applied 291 5 291 385 5 385 – Of which, interest-related derivatives for which fair value hedge accounting is applied 47 5 47 31 5 31 – Of which, currency derivatives related to commercial exposure for which cash flow hedge accounting is applied 10 5 10 161 5 161 Other financial liabilities 40,280 6 40,493 33,575 6 34,207 – Of which, financial liabilities for which hedge accounting is not applied 25,466 25,446 23,521 23,941 – Of which, financial liabilities for which fair value hedge accounting is applied 14,814 7 15,047 10,054 7 10,266 Total financial liabilities 40,628 40,841 34,152 34,784 1 Derivatives that are part of “Other current receivables” recognised in the balance sheet. 2 Part of “Short-term investments”. 3 Recognised in the balance sheet under “Cash and bank deposits”, “Interest-bearing trade receivables”, “Non-interest-bearing trade receivables”, “Non-current interestbearing receivables”, part of “Other non-current receivables”, part of “Short-term investments” and part of “Holdings in associated companies and joint ventures”. 4 Operating leases amounting to SEK 5,934 m. (6,009) are not included in the table. 5 Derivatives that are part of “Other current liabilities” recognised in the balance sheet. 6 Recognised in the balance sheet under “Trade payables”, “Current interest-bearing liabilities” and “Non-current interest-bearing liabilities”. 7 Recognised in the balance sheet as part of “Current interest-bearing liabilities” and “Non-current interest-bearing liabilities